Podcast
Questions and Answers
A corporation distributes property to a shareholder. Under which condition does the corporation generally recognize a gain on the distribution?
A corporation distributes property to a shareholder. Under which condition does the corporation generally recognize a gain on the distribution?
- When the fair market value (FMV) is less than the corporation's adjusted basis (AB).
- When the fair market value (FMV) is greater than the corporation's adjusted basis (AB). (correct)
- When the fair market value (FMV) is equal to the corporation's adjusted basis (AB).
- A corporation never recognizes a gain on the distribution of property to a shareholder.
When both current and accumulated E&P are negative, distributions are first considered dividends up to the extent of the shareholder's stock basis.
When both current and accumulated E&P are negative, distributions are first considered dividends up to the extent of the shareholder's stock basis.
False (B)
In the context of corporate distributions, what value does the shareholder use to determine their basis in the distributed property?
In the context of corporate distributions, what value does the shareholder use to determine their basis in the distributed property?
Fair Market Value
If current E&P is positive and accumulated E&P is negative, all distributions to the extent of the current E&P are treated as __________.
If current E&P is positive and accumulated E&P is negative, all distributions to the extent of the current E&P are treated as __________.
Current E&P is ($50,000) and Accumulated E&P is $100,000. A corporation distributes $75,000 to its shareholders. How is the distribution treated for tax purposes?
Current E&P is ($50,000) and Accumulated E&P is $100,000. A corporation distributes $75,000 to its shareholders. How is the distribution treated for tax purposes?
Match each E&P scenario with the appropriate tax treatment for distributions:
Match each E&P scenario with the appropriate tax treatment for distributions:
What is the correct order to analyze the tax consequences of a property distribution?
What is the correct order to analyze the tax consequences of a property distribution?
In a corporate distribution of property, the E&P account is always reduced by the fair market value (FMV) of the property distributed.
In a corporate distribution of property, the E&P account is always reduced by the fair market value (FMV) of the property distributed.
If both Current E&P and Accumulated E&P are negative, what happens to the negative E&P?
If both Current E&P and Accumulated E&P are negative, what happens to the negative E&P?
If Current E&P is negative and Accumulated E&P is positive, what happens?
If Current E&P is negative and Accumulated E&P is positive, what happens?
When both Current E&P and Accumulated E&P are positive, how is the current portion of E&P allocated?
When both Current E&P and Accumulated E&P are positive, how is the current portion of E&P allocated?
How is Accumulated E&P applied when both Current E&P and Accumulated E&P are positive?
How is Accumulated E&P applied when both Current E&P and Accumulated E&P are positive?
If Current E&P is positive and Accumulated E&P is negative, and all distributions are to the extent of basis, what are the distributions considered?
If Current E&P is positive and Accumulated E&P is negative, and all distributions are to the extent of basis, what are the distributions considered?
If Current E&P is positive and Accumulated E&P is negative, and there is an excess beyond the basis, what is this excess considered?
If Current E&P is positive and Accumulated E&P is negative, and there is an excess beyond the basis, what is this excess considered?
If Current E&P is negative and Accumulated E&P is positive, the current Accumulated E&P is netted.
If Current E&P is negative and Accumulated E&P is positive, the current Accumulated E&P is netted.
If Current E&P is positive and Accumulated E&P is negative, to what extent are the All distributions dividends?
If Current E&P is positive and Accumulated E&P is negative, to what extent are the All distributions dividends?
What is the primary significance of a corporation's Earnings and Profits (E&P)?
What is the primary significance of a corporation's Earnings and Profits (E&P)?
When computing Earnings and Profits (E&P), which of the following serves as the starting point?
When computing Earnings and Profits (E&P), which of the following serves as the starting point?
Distributions are presumed to come from the corporation's E&P, unless there are no E&P.
Distributions are presumed to come from the corporation's E&P, unless there are no E&P.
The Internal Revenue Code (IRC) provides an exact, mechanical definition of Earnings and Profits (E&P).
The Internal Revenue Code (IRC) provides an exact, mechanical definition of Earnings and Profits (E&P).
List three items included in the definition of property when considering corporate distributions.
List three items included in the definition of property when considering corporate distributions.
A corporate shareholder may prefer dividend treatment for a distribution it receives because of the availability of a ____________ deduction.
A corporate shareholder may prefer dividend treatment for a distribution it receives because of the availability of a ____________ deduction.
Which of the following adjustments should be added to Taxable Income (TI) when calculating Earnings and Profits (E&P)?
Which of the following adjustments should be added to Taxable Income (TI) when calculating Earnings and Profits (E&P)?
Match each item with its effect on the amount of a corporate distribution:
Match each item with its effect on the amount of a corporate distribution:
Refunds of prior years' federal income tax should be ______ to Taxable Income when computing E&P.
Refunds of prior years' federal income tax should be ______ to Taxable Income when computing E&P.
Which of the following items is NOT added back to taxable income when calculating Earnings and Profits (E&P)?
Which of the following items is NOT added back to taxable income when calculating Earnings and Profits (E&P)?
What is the tax treatment for portions of a distribution treated as a recovery of capital for an individual shareholder?
What is the tax treatment for portions of a distribution treated as a recovery of capital for an individual shareholder?
Distributions are presumed to come from the shareholder's capital contributions before being considered dividends.
Distributions are presumed to come from the shareholder's capital contributions before being considered dividends.
Expenditures and losses that are not deductible from gross income in computing Taxable Income (TI) are generally:
Expenditures and losses that are not deductible from gross income in computing Taxable Income (TI) are generally:
An individual shareholder receiving nondividend treatment for a portion of a distribution may benefit because it could be treated as LTCG. What are the possible maximum tax rates for LTCG?
An individual shareholder receiving nondividend treatment for a portion of a distribution may benefit because it could be treated as LTCG. What are the possible maximum tax rates for LTCG?
Recoveries of deduction items that produced no tax benefit in prior years should be subtracted from taxable income when computing E&P.
Recoveries of deduction items that produced no tax benefit in prior years should be subtracted from taxable income when computing E&P.
Match each adjustment category to the corresponding action when computing E&P:
Match each adjustment category to the corresponding action when computing E&P:
A corporation with positive current E&P and negative accumulated E&P makes a distribution. How is the distribution taxed to the shareholder?
A corporation with positive current E&P and negative accumulated E&P makes a distribution. How is the distribution taxed to the shareholder?
If a corporation has negative current and accumulated E&P, distributions are treated as dividends.
If a corporation has negative current and accumulated E&P, distributions are treated as dividends.
A corporation has accumulated E&P of $50,000 at the beginning of the year and a current year loss of $20,000. If a $40,000 distribution is made on July 1, what amount is considered a dividend?
A corporation has accumulated E&P of $50,000 at the beginning of the year and a current year loss of $20,000. If a $40,000 distribution is made on July 1, what amount is considered a dividend?
When a corporation has positive current E&P and positive accumulated E&P, the accumulated E&P is applied in ______ order.
When a corporation has positive current E&P and positive accumulated E&P, the accumulated E&P is applied in ______ order.
A corporation has a current year loss. How is this loss treated for determining the available AE&P at the time of distribution?
A corporation has a current year loss. How is this loss treated for determining the available AE&P at the time of distribution?
Once E&P is exhausted, any remaining distribution is always considered a capital gain.
Once E&P is exhausted, any remaining distribution is always considered a capital gain.
What happens when distributions exceed both the shareholder's basis and the corporation's E&P?
What happens when distributions exceed both the shareholder's basis and the corporation's E&P?
If current E&P is negative and accumulated E&P is positive, the corporation ______ negative E&P up to the point of each distribution.
If current E&P is negative and accumulated E&P is positive, the corporation ______ negative E&P up to the point of each distribution.
Flashcards
FMV (Fair Market Value)
FMV (Fair Market Value)
The price at which property would sell in a competitive market.
AB (Adjusted Basis)
AB (Adjusted Basis)
The original value of property adjusted for tax purposes.
E&P (Earnings and Profits)
E&P (Earnings and Profits)
A measure of a corporation's ability to pay dividends.
Tax consequences for corporation
Tax consequences for corporation
Signup and view all the flashcards
Adjusted current E&P
Adjusted current E&P
Signup and view all the flashcards
Distributions scenario with positive E&P
Distributions scenario with positive E&P
Signup and view all the flashcards
Distributions excess of basis
Distributions excess of basis
Signup and view all the flashcards
Deficit in E&P
Deficit in E&P
Signup and view all the flashcards
Negative E&P Allocation
Negative E&P Allocation
Signup and view all the flashcards
Dividends from Positive E&P
Dividends from Positive E&P
Signup and view all the flashcards
Accumulated E&P Treatment
Accumulated E&P Treatment
Signup and view all the flashcards
Return of Basis
Return of Basis
Signup and view all the flashcards
Current E&P Utilization
Current E&P Utilization
Signup and view all the flashcards
Excess Distribution Capital Gains
Excess Distribution Capital Gains
Signup and view all the flashcards
Chronological E&P Application
Chronological E&P Application
Signup and view all the flashcards
Negative E&P Restrictions
Negative E&P Restrictions
Signup and view all the flashcards
Double E&P Assessment
Double E&P Assessment
Signup and view all the flashcards
Distribution Order Impact
Distribution Order Impact
Signup and view all the flashcards
Earnings and Profits (E&P)
Earnings and Profits (E&P)
Signup and view all the flashcards
Computing E&P
Computing E&P
Signup and view all the flashcards
Taxable Income (TI)
Taxable Income (TI)
Signup and view all the flashcards
Distribution Amount Calculation
Distribution Amount Calculation
Signup and view all the flashcards
Adjustment Categories
Adjustment Categories
Signup and view all the flashcards
Dividend Treatment
Dividend Treatment
Signup and view all the flashcards
Shareholder Preference for Dividends
Shareholder Preference for Dividends
Signup and view all the flashcards
Income Excluded from TI
Income Excluded from TI
Signup and view all the flashcards
Non-Dividend Treatment Benefits
Non-Dividend Treatment Benefits
Signup and view all the flashcards
Nondeductible Expenses
Nondeductible Expenses
Signup and view all the flashcards
Long-Term Capital Gains (LTCG)
Long-Term Capital Gains (LTCG)
Signup and view all the flashcards
Deferred Income Recognition
Deferred Income Recognition
Signup and view all the flashcards
Accelerated Deduction Items
Accelerated Deduction Items
Signup and view all the flashcards
Tax Max Rates for LTCG
Tax Max Rates for LTCG
Signup and view all the flashcards
Deductions Not Allowed for E&P
Deductions Not Allowed for E&P
Signup and view all the flashcards
Form 5452
Form 5452
Signup and view all the flashcards
Four E&P Scenarios
Four E&P Scenarios
Signup and view all the flashcards
Positive E&P Distribution
Positive E&P Distribution
Signup and view all the flashcards
Negative E&P Distribution
Negative E&P Distribution
Signup and view all the flashcards
Current Positive, Accumulated Negative E&P
Current Positive, Accumulated Negative E&P
Signup and view all the flashcards
Current Negative, Accumulated Positive E&P
Current Negative, Accumulated Positive E&P
Signup and view all the flashcards
E&P Exhaustion
E&P Exhaustion
Signup and view all the flashcards
Pro-rated Loss Impact
Pro-rated Loss Impact
Signup and view all the flashcards
Dividend Determination
Dividend Determination
Signup and view all the flashcards
Study Notes
Corporate Distributions and E&P
- Gain recognition on property distribution occurs when fair market value (FMV) exceeds the corporation's adjusted basis (AB). Shareholder's AB is the FMV of the distributed property.
- Distributions reduce corporate E&P up to the amount of existing distributable E&P. Distributions exceeding E&P reduce paid-in capital.
- A distribution to a shareholder is initially considered a dividend to the extent of current earnings and profits (E&P), then to the extent of accumulated earnings and profits (AE&P).
- The amount of the distribution is determined by the shareholder's basis in the stock, up to the maximum shareholder basis.
4-Step Process for Analyzing Corporate Distributions
- Step 1: Analyze tax consequences of property distribution to the distributing corporation.
- Step 2: Adjust the corporation's current E&P based on Step 1's findings.
- Step 3: Determine tax consequences for the shareholder receiving the property.
- Step 4: Adjust the corporation's accumulated E&P (AE&P) to reflect the distribution, adjusting for the next year.
Corporate Distribution Scenarios Based on E&P
- Positive Current & Accumulated E&P: Current E&P is allocated to distributions. Accumulated E&P is applied chronologically.
- Negative Current & Accumulated E&P: All distributions are returns of basis, up to the shareholder's basis. Excess is capital gain on stock to the investor.
- Positive Current E&P, Negative Accumulated E&P: Distributions up to the current E&P amount are dividends. Remaining distributions are returns of basis.
- Negative Current E&P, Positive Accumulated E&P: Negative current E&P is prorated against the distribution. The net of this and the accumulated E&P determines the dividend amount and a balance determines the return of basis.
False Statement Regarding Corporate Distributions
- False Statement: A distribution may reduce (generate a deficit in) a corporation's E&P. Distributions do not necessarily create or increase a deficit but may.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This lesson covers corporate distributions and their impact on a corporation's earnings and profits (E&P). It outlines a 4-step process for analyzing property distributions, including tax consequences for both the distributing corporation and the shareholder. Scenarios are explored based on the current and accumulated E&P.
