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If a company retains earnings, it has to pay taxes on them (as profits), but the money is still at risk (from a shareholder’s point of view) if something bad ha

by nickff 1y ago

If a company retains earnings, it has to pay taxes on them (as profits), but the money is still at risk (from a shareholder’s point of view) if something bad happens to the company (lawsuit or market problem). Shareholders usually want to receive whatever money the company has saved up, to safeguard it from being lost for no reason, and so that they (the shareholder) can put it to use elsewhere. This would change if the government stopped taxing retained earnings.

selfhoster11 1y ago
That doesn't fully explain why this doesn't happen with non-profits.
- olalonde 1y ago
  Many nonprofits do this — it’s called an endowment fund.
ta1243 1y ago
> This would change if the government stopped taxing retained earnings. No it wouldn't, because > the money is still at risk (from a shareholder’s point of view) if something bad happens to the company (lawsuit or market problem).
- warkdarrior 1y ago
  It would definitely change, because a shareholder could then take a loan against the non-taxed retained earnings they are owed. So then it comes down to whether the tax is higher or lower than the loan interest (adjust for the risk you mentioned).
lottin 1y ago
Retained earnings are not taxed per se. A company pays taxes on profits. Whether the profits are distributed to shareholders or retained makes no difference whatsoever as far as taxes are concerned.
- nickff 1y ago
  They are taxed; they are taxed because they are a subset of profits, which is a taxed category. They are not taxed more than other profits, but that doesn’t mean they’re ’not taxed’.
  - blibble 1y ago
    they are not retained earnings by definition are the accumulation of net incomes, and net income by definition is post tax what went into the produce the retained earnings (profit) has been taxed but the retained earnings themselves are not subject to additional taxation (with a few exceptions)

by nickff 1y ago

selfhoster11 1y ago

That doesn't fully explain why this doesn't happen with non-profits.

olalonde 1y ago
Many nonprofits do this — it’s called an endowment fund.

ta1243 1y ago

> This would change if the government stopped taxing retained earnings. No it wouldn't, because > the money is still at risk (from a shareholder’s point of view) if something bad happens to the company (lawsuit or market problem).

warkdarrior 1y ago
It would definitely change, because a shareholder could then take a loan against the non-taxed retained earnings they are owed. So then it comes down to whether the tax is higher or lower than the loan interest (adjust for the risk you mentioned).

lottin 1y ago

Retained earnings are not taxed per se. A company pays taxes on profits. Whether the profits are distributed to shareholders or retained makes no difference whatsoever as far as taxes are concerned.

nickff 1y ago
They are taxed; they are taxed because they are a subset of profits, which is a taxed category. They are not taxed more than other profits, but that doesn’t mean they’re ’not taxed’.
- blibble 1y ago
  they are not retained earnings by definition are the accumulation of net incomes, and net income by definition is post tax what went into the produce the retained earnings (profit) has been taxed but the retained earnings themselves are not subject to additional taxation (with a few exceptions)