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Simple English definitions for legal terms
undistributed-earnings tax
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A quick definition of undistributed-earnings tax:
An undistributed-earnings tax is a penalty tax that a corporation may have to pay if it retains its earnings instead of distributing them to shareholders as dividends. This tax is imposed by the government to prevent corporations from avoiding income tax liability. A tax is a charge imposed by the government on people, entities, transactions, or property to generate public revenue. It can be in the form of money or other contributions.
A more thorough explanation:
An undistributed-earnings tax is a penalty tax imposed on a corporation that has retained its earnings in an effort to avoid the income-tax liability arising once the earnings are distributed to shareholders as dividends.
For example, if a corporation earns $1 million in profits but decides not to distribute any dividends to its shareholders, it may be subject to an undistributed-earnings tax. This tax is meant to discourage corporations from hoarding profits and not sharing them with their shareholders.
Overall, a tax is a monetary charge imposed by the government on persons, entities, transactions, or property to yield public revenue. It can take many forms, including duties, imposts, and excises, and is used to support government and public needs.