If Current E&P is negative and Accumulated E&P is positive, what happens?
Understand the Problem
The question pertains to the tax treatment of corporate distributions when a corporation has both current negative earnings and profits (E&P) and accumulated positive E&P. Understanding the order in which these E&P amounts are applied is crucial to determining whether a distribution is treated as a dividend, a return of capital, or capital gain.
Answer
The current E&P deficit reduces the accumulated E&P, affecting the amount available for dividend payouts.
When a corporation has a current E&P deficit and positive accumulated E&P, the current E&P deficit reduces the accumulated E&P. The remainder, after this reduction, determines the amount available for paying out dividends.
Answer for screen readers
When a corporation has a current E&P deficit and positive accumulated E&P, the current E&P deficit reduces the accumulated E&P. The remainder, after this reduction, determines the amount available for paying out dividends.
More Information
Earnings and Profits (E&P) is a measure of a corporation's capacity to pay dividends from its earnings. It is similar to retained earnings but is calculated using tax accounting rules, which sometimes differ from generally accepted accounting principles (GAAP).
Tips
It is a common mistake to assume that a positive accumulated E&P always means there are sufficient funds for dividends. The current E&P can reduce this amount.
Sources
- Tax 2 chapter 4 Flashcards - Quizlet - quizlet.com
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