Corporate Distributions Flashcards
What are the tax consequences, if any, of distributions when current and accumulated earnings are negative?
Tax-free return of capital (up to adjusted basis), excess over basis is capital gain.
What are distributions considered when current earnings and profits (E&P) are negative and accumulated earnings are positive?
A dividend to the extent of net E&P (accumulated E&P less proportion of current loss) on the date of the distribution.
What effect does property distribution have on earnings and profits (E&P)?
Reduce E&P by greater of adjusted basis or value, then reduced by any liabilities assumed by shareholder;
Distributions of appreciated property also increase E&P by amount of gain.
What additions should be made to taxable income when earnings and profits are computed?
Municipal interest;
Life insurance income;
Dividends received deduction;
Deductions claimed for carryforward from prior years;
The deferred portion of a gain from a current installment sale;
The amount of depreciation deducted in excess of straight-line.
When is a distribution considered a dividend?
If earnings and profits are positive.
What are the tax consequences, if any, of distributions when current and accumulated earnings are positive?
Taxable as dividends.
What are distributions considered when current earnings and profits (E&P) are positive and accumulated earnings are negative?
A dividend only to extent of current E&P.
Define “constructive dividend.”
A payment to a shareholder that, despite not intended as a distribution of earnings, is regarded as a dividend.
What deductions should be taken from taxable income when earnings and profits are computed?
Federal income tax (net of credits);
Net capital loss;
Excess amounts of charitable contributions;
Penalties;
Life insurance premiums for a key employee;
Disallowed portion of entertainment expenses;
Deferred gains on installment sales recognized in later years;
Reversal of taking out excess depreciation over straight- line.
What types of distributions reduce earnings and profits?
Cash distributions;
Property distributions.
