Corporate E&P Flashcards
What is E&P?
Corporate Earnings and Profits is similar in concept to Retained Earnings, but are not exactly the same. E&P is calculated according to taxes rules, RE is calculated based on GAAP rules.
How is E&P calculated?
The calculation of E&P (both current and prior accumulated amounts) is required in the preparation of the corporate income tax return. E&P is calculated by adjusting the taxable income of the corporation for items that have not been reflected on the income tax, but that have an impact on the corporation’s ability to pay dividends.
What is the impact of E&P on corporate distributions and other activities?
RE presents the net financial position of the Shareholders of a Corp. and is often used in the valuation of the Corp’s CS.; a Corp’s E&P is a major factor n determining the ability of the Corp to pay dividend to the shareholder. The calculation of E&P is also critical to the tax impact of of corporate distributions, or non liquidating dividends (note 20% shareholder rule).
E&P is a factor in the determination of corporate reorganizations, accumulated earnings tax, stock redemptions, partial liquidations, and the tax status of certain S corps that have previously been C corps (e.g. passive income limit rules).
What is the general calculation formula used to calculate the current E&P?
Start w/ corporate taxable income for the year and apply adjustments in accordance w/ tax code (see M1 reconciliation)
What are the always Negative adjustments?
These are deducted from corporate taxable income. They were added to NI in the M1 reconciliation.
-Negative Adjustments (reduces current E&P)
Fed. Income Tax Expense
Non-deductible penalties, fines, political contributions, Meals & Ent. (the 50% non-deductible)
Life Ins. Premiums (Corp. beneficiary)
Expenses for production of tax-exempt income
Non-deductible charitable contributions
Non-deductible capital losses
What are the always Positive adjustments?
These are added to corporate taxable income. They were deducted from NI in the M1 reconciliation.
+Positive Adjustments (increases current E&P)
Refunds of Federal income tax paid
Tax-exempt income
Refunds of items that were not subject to regular tax under the tax benefit rule
NOL deductions
Life Insurance proceeds where corporation is beneficiary – increase in cash surrender value
DRD used to calculate regular taxable income
Carryover of capital losses that impacted taxable income
Carryovers of charitable contributions that impacted taxable income
Non-taxable cancellation of debt not used to reduce basis of property
What are the adjustments that may be positive or negative for E&P?
These are the temporary differences in the M!
+/- Positive or Negative adjustments – Adjusts current E&P
Losses and gains that have different effects on taxable income vs. E&P
Changes in the cash surrender value of certain life insurance policies
Excess depreciation for E&P over that for regular income tax
Differences in allowable deductions for organizational and start-up expenses
Installment income method adjustments
Completed contract income vs. % of completion income adjustments
Amortization of intangibles
Section 179 expense p/ regular tax vs. ratable depreciation on the same property using a 5 year life
How are E&P allocated when dividends are in excess of earnings?
They are allocated on a pro-rata basis to each distribution for total distribution.
- Divide the distribution/total distribution.
- Take the % of the distribution allocation X current E&P
- Take the % of the distribution allocation X Accum. E&P
How are the distribution classified?
Classification of distribution
E&P = First current, then accum = Dividend Income
No E&P = Return to capital = Not taxed
No basis = Capital Gain distribution
*** DO NOT NET current and Accum.
