ACCT 530: Advanced Income Tax Module 4: Corporations' Earnings & Profits and Dividend Distributions Calculating Earnings and Profits (E&P)
Module 4 - Learning Objective 1 Calculate earnings and profits for U.S. corporations, as defined by the U.S. Internal Revenue Code
Ch 3 - Introduction and Operating RulesCh 4 -Organizationand CapitalStructureCh 5 - E&P and Distributions Ch 6 - Redemptions and Liquidations
Earnings & Profits • Following the rules from Chapter 3, corporations earn money (or sustain losses) • Following the rules from Chapter 4, each shareholder has a basis in the corporation and the corporation has a basis in each asset held • Chapter 5 will combine these two chapters to: - (1) determine the corporation's E&P - (2) use accumulated and current E&P to assess the tax treatment of distributions to shareholders
Earnings & Profits Lynch invests in Badger Corp. with a $100,000 cash contribution in year 20X1. In year 20X2, Badger Corp. has taxable income of $50,000 and distributes $10,000 to Lynch. The $10,000 distribution is a dividend, taxed at a preferential rate
Earnings & Profits Lynch invests in Badger Corp. with a $100,000 cash contribution in year 20X1. In year 20X2, Badger Corp. has taxable income of $50,000 and distributes $10,000 to Lynch.In year 20X3, Badger has taxable income of $10,000 and distributes $70,000 to Lynch. Lynch bought in for $100,000. Badger has had income of $60,000, but has paid out $80,000.Is all of the distribution in year 20X3 a dividend?
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