26 U.S.C. § 535 — Accumulated taxable income

(a) Definition. "Accumulated taxable income" means taxable income — after the adjustments in subsection (b) — minus two things added together: the dividends-paid deduction (defined in section 561) and the accumulated earnings credit (defined in subsection (c)). (b) Adjustments to taxable income. To figure accumulated taxable income, taxable income gets adjusted like this: (1) Taxes. The company can deduct federal income and excess profits taxes, and foreign income, war-profits, and excess-profits taxes (as far as section 275(a)(4) doesn't already disallow them), that accrued during the year or are treated as paid under section 960. This doesn't include the accumulated earnings tax itself (section 531) or the personal holding company tax (section 541). (2) Charitable contributions. The company can deduct charitable contributions under section 170, without the limit that section 170(b)(2) would otherwise apply. (3) Special deductions disallowed. The special corporate deductions in part VIII of subchapter B (mainly the dividends-received deduction) are not allowed here, except for section 248. (4) Net operating loss. The net operating loss deduction under section 172 is not allowed. (5) Capital losses. (A) In general. The company can deduct its net capital loss for the year (figured without paragraph (7)(A)). (B) Recapture of previous deductions for capital gains. That deduction gets reduced by the smaller of (i) its "nonrecaptured capital gains deductions," or (ii) its accumulated earnings and profits at the end of the prior year. (C) Nonrecaptured capital gains deductions means the amount by which (i) the total deductions taken under paragraph (6) in prior years starting after July 18, 1984, is more than (ii) the total reductions already made under subparagraph (B) in prior years. (6) Net capital gains. (A) In general. The company can deduct (i) its net capital gain for the year (figured with paragraph (7) applied), minus (ii) the taxes tied to that gain. (B) Attributable taxes. Those taxes equal the difference between (i) the taxes this subtitle would impose for the year (not counting the accumulated earnings tax itself), and (ii) what those taxes would be if the net capital gain (figured without paragraph (7)) were left out of taxable income. (7) Capital loss carryovers. (A) Unlimited carryforward. A net capital loss for a year is treated as a short-term capital loss the next year. (B) Section 1212 inapplicable. The usual capital-loss carryback or carryforward under section 1212 does not apply here. (8) Special rules for mere holding or investment companies. For a company that is just a holding or investment company: (A) Paragraphs (5) and (7)(A) — the capital loss deduction rules — don't apply. (B) The company can instead deduct its net short-term capital gain for the year, up to the amount of any capital loss carryover it has under section 1212 (figured without paragraph (7)(B)). (C) For measuring earnings and profits under subchapter C, they can never be treated as lower than they would be if this subsection had applied to every year starting after July 18, 1984. (9) Special rule for capital gains and losses of foreign corporations. For a foreign corporation, paragraph (6) only counts gains and losses that are effectively connected with a U.S. trade or business and not tax-exempt under a treaty. (10) Controlled foreign corporations. The company can deduct the amount of its income for the year that a U.S. shareholder must include in gross income under section 951(a). If a corporation's accumulated taxable income would otherwise be figured with no deductions at all, this deduction is still allowed, adjusted to reflect any deductions that already reduced that inclusion. (c) Accumulated earnings credit. (1) General rule. For a company that is not a mere holding or investment company, the credit equals (A) the part of the year's earnings and profits kept for the business's reasonable needs, minus (B) the deduction allowed under (b)(6). The amount "kept" is the amount by which the year's earnings and profits exceed the dividends-paid deduction for that year. (2) Minimum credit. (A) In general. The credit can never be less than $250,000 minus the company's accumulated earnings and profits at the end of the prior year. (B) Certain service corporations. For a company mainly performing services in health, law, engineering, architecture, accounting, actuarial science, the performing arts, or consulting, "$150,000" replaces "$250,000" in that formula. (3) Holding and investment companies. For a mere holding or investment company, the credit is however much $250,000 exceeds its accumulated earnings and profits at the end of the prior year. (4) Accumulated earnings and profits. For paragraphs (2) and (3), that prior-year accumulated earnings and profits figure gets reduced by dividends that section 563(a) treats as paid during the year (dividends actually paid after the year closes). (5) Cross reference. Section 1561 limits this credit for certain groups of related corporations. (d) Income distributed to United States-owned foreign corporation retains United States connection. (1) In general. If 10 percent or more of a foreign corporation's earnings and profits for a year either (A) comes from U.S. sources, or (B) is effectively connected with a U.S. trade or business, then any distribution from those earnings (or related interest payment) that a "United States-owned foreign corporation" receives — directly or through other entities — is treated as U.S.-source income for that corporation. (2) United States-owned foreign corporation has the meaning given in section 904(h)(6).