Earnings and Profits
Tx 8120
Fore Objectives
You should be able to:
1.
2.
3.
4.
Explain the _______ of E&P,
Determine whether E&P must follow
_____ or ________ basis rules.
Identify differences between E&P
and ________ _______, and
Calculate ________ E&P.
Earnings & Profits
• Code describes how certain transactions
_____ E&P but does not _____ the concept
• Purpose:
– Measures ________-paying ability
– Represents how much can be distributed
without dipping into _________
• Not same as:
– Taxable income or
– _______ earnings
Calculating Current E&P
Taxable income (or net operating loss)
+
and certain deferred income
expenses
+
not affecting E&P
(or deficit)
- Current
.
Residual (or shortfall) increases (decreases) ______
Mazzocchi Bus Co. v. CIR
(CA-3, 1994)
The owner of a closely-held, _____ basis corporation
diverted corporate receipts for his personal use and
failed to report the gross income on either the corporate
or his individual return. After the owner’s conviction for
tax evasion, the corporation paid taxes, penalties, and
interest. To treat some of the constructive distribution as
a return of capital, the individual argued the corporation
can reduce E&P by the ________ but _______ taxes,
penalties, and interest. The ______ was silent on this
point.
Mazzocchi Bus Co. v. CIR
(CA-3, 1994)
Relying on a long-standing regulation and affirming
the Tax Court, the holding required __________. To
hold otherwise would “unnecessarily add complexity
…, undesirably distort [E&P], and unjustifiably engraft
an unprincipled exception ….” Thus, a corporation
calculating taxable income using the cash method must
determine E&P ___________.
Exclusions Increasing CE&P
• These items are:
– ____ included in gross income
– But ________ ability to pay dividends
• Examples:
– ________ bond interest
– _____ insurance proceeds
– _______ income tax refund
Deferrals Increasing CE&P
• Some deferrals require no adjustments:
– _________ exchanges
– _____________ conversions
– Transfers under _____
• Installment sales method __________ :
– CE&P increased for ___________ gain when sold
– CE&P decreased for __________ gain in later years
• __________ contract method disallowed
Nondeductibles Decreasing CE&P
• These items are:
– Not deductible for tax purposes
– But __________ ability to pay dividends
• Examples:
–
–
–
–
______ ______ tax paid
_______ and fines
_________ contributions and ______ expenses
_________ person losses and expenses
Nondeductibles Decreasing CE&P
(continued)
– Interest expense related to _________ income
– _____ insurance premiums that corporate
beneficiary pays for ____ employees
– Disallowed travel, ______, and _____________
– Charitable contributions __ ____ of taxable
income
– Net capital ______
– _______ income tax
Deductions Not Affecting CE&P
• These items are:
– Deductible in computing taxable income
– But do not ________ ability to pay dividends
• Dividend _________ deduction
• Carryover deductions from other years:
– Net _______ _____ deduction
– ___________ contribution deduction
– ________ loss deduction
Deductions Not Affecting CE&P
(continued)
• Excess depreciation:
– CE&P requires __________ over longer lives
of __________ depreciation system
– CE&P requires ___________ over __ years
for any amount “expensed” under §179
• Excess depletion and amortization:
– ____ depletion required
– _____________ expenses are capitalized
Lind et al., p. 168
X Corporation is a cash method
taxpayer with the following income
and expenses for the year:
Gross profit from sales
$20,000
Salaries paid to employees
10,250
Tax-exempt interest received
3,000
Dividends received from IBM
5,000
Depreciation*
2,800
LTCG from selling stock
2,500
LTCL from selling stock
5,000
LTCL carryforward from prior year 1,000
Estimated federal income tax paid
800
*Paid $14,000 this year for 5-year property but did not elect §179
immediate deduction. For E&P purposes, the property has a 7-year class
life.
Compute taxable income and CE&P.
Taxable
Income
CE&P
E&P Exercise
MedCo has the following income and
expenses for the year:
Gross manufacturing profit
$380,000
Administrative expenses
135,000
Interest income: Corporate notes 43,000
Municipal bonds
8,000
Key man life insurance proceeds 200,000
Depreciation: Book
55,000
Tax
84,000
ADS
52,000
§1231 gain from selling realty
21,000
NOL carryover from last year
55,000
Charity:
Current
4,000
Carryforward
2,000
Penalty for late payment of tax
1,000
Capital loss from selling stock
3,000
Compute taxable income and CE&P.
Taxable
Income
CE&P