Which of the following adjustments should be added to Taxable Income (TI) when calculating Earnings and Profits (E&P)? A) Income excluded from Taxable Income B) Capital losses C) A... Which of the following adjustments should be added to Taxable Income (TI) when calculating Earnings and Profits (E&P)? A) Income excluded from Taxable Income B) Capital losses C) Accelerated depreciation D) Expenses deductible for Taxable Income
Understand the Problem
The question is asking which of the listed adjustments (income excluded from taxable income, capital losses, accelerated depreciation, or expenses deductible for taxable income) should be added back to Taxable Income (TI) to arrive at Earnings and Profits (E&P). E&P aims to reflect a company's true economic capacity to pay dividends, so items that reduce TI but don't represent actual cash outflows often need to be added back.
Answer
A) Income excluded from Taxable Income
The correct answer is A) Income excluded from Taxable Income. When calculating Earnings and Profits (E&P), items excluded from Taxable Income, such as municipal bond interest, are added back to Taxable Income.
Answer for screen readers
The correct answer is A) Income excluded from Taxable Income. When calculating Earnings and Profits (E&P), items excluded from Taxable Income, such as municipal bond interest, are added back to Taxable Income.
More Information
Earnings and Profits (E&P) is a measure of a corporation's ability to pay dividends out of its current and accumulated earnings without impairing capital. It starts with taxable income and then makes several adjustments.
Tips
A common mistake is to confuse E&P with taxable income or retained earnings. E&P requires specific adjustments to taxable income.
Sources
- Earnings and Profits Computation Case Study - The Tax Adviser - thetaxadviser.com
- Accumulated Earnings and Profits (E&P): Definition, Vs. Retained - investopedia.com
- Federal income taxes paid. - UH Law Center - law.uh.edu
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