What is Current and accumulated earnings and profits?
In short
Corporate distributions are dividends first to the extent of current-year earnings and profits, shared pro rata among the year's distributions, then to the extent of accumulated earnings and profits, in date order.
Key takeaways
- With positive current earnings and profits, distributions are dividends even if there is an accumulated deficit.
- With a current deficit and positive accumulated earnings and profits, the two are netted at the date of each distribution.
- Amounts beyond both are a tax-free return of basis, then capital gain.
Where it's tested
REG: C Corporation Taxation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A corporation with no current or accumulated earnings and profits distributes $50,000 cash to a shareholder whose stock basis is $30,000. How is the distribution treated by the shareholder?