Daystar Corp. which is not a mere holding or investment company, derives its income from consulting services. Daystar had accumulated earnings and profits of $45,000 at December 31, 2012. For the year ended December 31, 2013, it had earnings and profits of $115,000 and a dividends-paid deduction of $15,000. It has been determined that $20,000 of the accumulated earnings and profits for 2013 is required for the reasonable needs of the business. How much is the allowable accumulated earnings credit at December 31, 2013?
a. $105,000
b. $205,000
c. $150,000
d. $250,000
Answer:A
The requirement is to determine Daystar’s allowable accumulated earnings credit for 2013. The credit is the greater of (1) the earnings and profits of the tax year retained for reasonable business needs of $20,000; or (2) $150,000 less theaccumulated earnings and profits at the end of the preceding year of $45,000. Thus, the credit is $150,000 – $45,000 = $105,000. Note that Daystar qualifies for only the $150,000 minimum credit (not the $250,000 credit) because it is a personal service corporation.