In short
Earnings and profits (E&P) measure a corporation's economic ability to pay dividends. Distributions are dividends to the extent of current and then accumulated earnings and profits.
Key takeaways
- Distributions beyond earnings and profits are a tax-free return of stock basis, then capital gain.
- Current earnings and profits support dividends even when accumulated earnings and profits are negative.
- It differs from taxable income; for example, tax-exempt income increases it and federal income tax reduces it.
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?