Most people work under the false assumption that having over $250,000 in
retained earnings automatically triggers AET.

This is not the case, in fact, most C-Corps that have been around for awhile
exceed $250,000.

The real gauge is not retained earnings, but excess CASH held in the company
and not distributed as Dividends.

Keep cash from piling up and you are fine ;-)

If operations and growth don't keep cash from accumulating to excessive
levels, then make use of non-deductable expenses like Life Insurance
Policies, Country Club or CEO group membership dues for the owner paid by the
company etc.

Also, principle payments on debt is a great tool for keeping cash low even
when retained earnings are high.

The key is to not let excess undistributed cash accumulate.

Can you imagine the tax hit Microsoft would take if they had to pay AET?

Companies like Microsoft become exceptional at justifying their cash levels
in relationship to their retained earnings in order to avoid AET.

If all else fails with regard to keeping cash levels from becoming excessive,
start recording a plan for how you are going to use the cash as a defensive
position in your market sector, or how you are going to grow the company with
future acquisitions etc....this will create a history of documentation of a
"valid business purpose" for the surplus cash reserves.

In summary:

Retained Earnings over $250,000 can trigger a review to see if you owe AET,
but ultimately its your cash levels and/or documented constructive plans for
excess cash that decides whether you get accessed.

It does not make sense to pay yourself salary from retained earnings or putting it into a deferred comp plan. Your corporation has already paid income taxes on those earnings. Paying income taxes twice is really the worst thing you could do. Dividend tax rates are going up in 2011 so giving up 15% is not a bad option. If your corporation has been around for 5 years you can convert to an S. Whether you should or not, or come up with an alternative plan is more complex. Both of these issues is something I help my clients evaluate. You may get in touch with me through my website below.

Glad to see that you are thinking about this now and not waiting until year's end. As stated, you should think about talking with a CPA. You also might consider some other alternatives. Are you looking to expand or grow this year or next? If so, there are programs like Section 179 or even programs in the stimulus act that could help your business grow and reduce its taxable income through deductions and credits - might be another way of thinking forward - benefiting your business in the future and reducing your tax burden today. Just some thoughts

I am not 100% confident about my answers but do take it into consideration and find out more about what I have to say below.   I won't be able to answer all the questions that you have, but I can answer some of them for you.   A C-Corp has a double taxation effect.  Your income, after you deduct your expenses (salary expense is included here), wil get taxed at the corporate tax rate.  The remainder, after you distribute any dividends, then becomes your retained earnings.  Any dividend distribution, as you mentioned, is subject to a personal 15% dividend tax.  Thus, for a sole owner like yourself, you are basically taxed twice for the money that goes through a corporation.   Normally, you will only get taxed once at the personal level if you pay yourself a salary since salary expense is deducted off the income before corporate taxation.   However, if you pay yourself tax after the income has become retained earnings, you will pay double tax again because your retained earnings has already been taxed at the corporate level and now that you pay yourself a salary, you will pay for personal tax.  In fact, at this point, you might pay even more personal tax than the dividen tax rate.  It may actually be better to distribute dividend instead if that were the case.  But you'd have to compare your effective personal tax rate to the dividend rate to come up with a conclusion.   Unfortunately, no matter what you do, you cannot use corporate losses to offset your personal income gains as your C-Corp is considered an entirely separate entity.  Losses are not passed through to your personal tax side.  For this to work, you need to be an S-Corp.  S-Corp allows you to pass through all income and losses to the personal level.  The corporation itself is never taxed other than the $800 annual franchise tax fee.   Converting an existing C-Corp to an S-Corp might not be possible if you're already in operation for a while.  By IRS regulations, you need to file for S-Corp status within 2 months (you might need to check this number) of establishing your corporation.  If you do not, I believe it's fairly difficult, if not impossible, to change to S-Corp status afterwards.  Your only option after this would be to create a new corporation and then merge the old one into the new corp.  A lot of process would be involved with this, and I'd advise consulting a lawyer about this.   Hope that clears up some of your questions