R3- Corporate Earnings and Profits, Corporate Distributions

Question 1

What is difference between the E&P and Retained Earnings?

Answer 1

E&P are calculated as per federal taxation rules

Retained earnings are calculated as per GAAP

Question 2

Where do we start to calculate E&P of a c corp?

Answer 2

Start with Corporate Taxable Income

Question 3

What are the kind of adjustments?

Answer 3

Negative adjustments- Reduce E&Ps

Positive adjustments- Increase E&Ps

Question 4

What are some of negative adjustments?

Answer 4

Federal Income tax expense
Non-deductible penalties, fines, meals and entr.
Officer life insurance premiums, Corp a beneficiary
Non-deductible Charitable contributions and Capital losses

Question 5

What are some of positive adjustments?

Answer 5

1. Refunds of federal income tax paid
2. Tax Exempt income
3. Increase is CSV of insurance policy

Question 6

Which adjustments can be + or - ?

Answer 6

1. Changes in CSV insurance policy
2. Difference in allowable deductions for startupcosts
3. installment income method adjustments
4. completed contract vs percentage completed
5. Sec 179 expense per regular tax vs ratable depreciation on the same property using a 5 yr life

Question 7

How are corporate dividends applied?

Answer 7

Current yr E&P (by yr end)- Taxable dividend
Accumulated E&P (distribution date)- Taxable dividend
Return of capital (no E&P)- Tax free and reduces basis of common stock
Capital Gain distribution (No E&P)- Taxable Income as a capital gain

Question 8

How is Stock Dividends taxed?

Answer 8

Non Taxable

Unless the shareholder has a choice of receiving cash or other property

Question 9

How is basis allocated in stock dividend?

Answer 9

new basis per stock = old basis/ old stock + new stock

Question 10

What is shareholder taxable amount?

Answer 10

Individual-

1. cash- amount rec’d
2. property- fmv of property rec’d

Corporation

1. Cash- amount rec’d
2. property- FMV of property rec’d

Question 11

What are the tax consequences for Corp paying dividend?

Answer 11

GR- No taxable event

reduces e&p

Question 12

What if Corp gives Property as dividend?

Answer 12

a. Corp recognizes gain as if property is sold
FMV- NBV= Gain
b. Receiving shareholder includes the FMV of property in income as a dividend to the extent of E&P
c. when appreciated property is distributed, corp cannot recognize gain

Question 13

What are the rules for Property Dividends?

Answer 13

if by giving property as dividend creates corp gain i.e. increases or creates corporate E&P
dividend is now taxable to the extent of e&p

Question 14

What is stock redemption?

Answer 14

• when a corporation buys back stock from its shareholders
• if the stock redemption qualifies for sale or exchange treatment, gain or loss is recognized by the sh
• if not the redemption is treated as a dividend to the extent of the corp e&p

-the corp can recognize gain but not loss, on any appreciated property distributed though it had sold the property at FMV