Tax 2 Study Guide
Tax Study Guide
Chapter 19: Distributions that are not in complete liquidation
Earnings & Profit is the ability of a corporation to pay a dividend. Similar to the accounting concept of retained earnings. Both are measures of the firm’s accumulated capital (E&P includes both the accumulated E&P of the corporation since February 28, 1913, and the current year’s E&P).
*Both cash and accrual basis corporations use the same approach when determining E&P.
How to calculate E&P:
Taxable Income
+ Tax exempt income (ability to pay dividend)
+ Dividend received deduction
+ DPAD (domestic production activates deduction)
+ Life insurance proceeds (anything over cash surrender value)
+ Deferred gain on installment sale in year used
+ Carryovers NOL, charitable C/L in year used
+ Income tax refund
+ Organization expenses
+ Increase in LIFO recapture
+ Accelerated depreciation, bonus depreciation, and 179 expense
179 Expense for E&P Use:
1. ADS for depreciation
2. No bonus depreciation (additional 1st year depreciation)
3. 179 expense allowed to take, but must take over 5 years + 80% of 179
Year 2 - 20% of 179
Year 3 - 20% of 179
Year 4 - 20% of 179
Year 5 - 20% of 179
- Future recognition of installment gain (gain recognized in the year)
- Federal income tax paid
- Excess C/L + charitable (year incurred)
- Loss on sale for related parties
- Non-deduction Meals & Entertainment (50%)
- Payment of non-deductible premiums (key life insurance – (minus) increase in the cash surrender value)
- Payment in LIFO recapture
- 20% 179 allowance year
Accumulated E&P is the total of all previous years’ current E&P (since February 28, 193) reduced by distributions made from E&P in previous years.
Allocating E&P to Distributions
1. Current & Accumulated E&P are positive (Net)
Distribution comes first from current E&P on a pro rata basis (dollar amounts), and then accumulated E&P is applied in chronological order
2. Current E&P is positive, accumulated
Chapter 19: Distributions that are not in complete liquidation
Earnings & Profit is the ability of a corporation to pay a dividend. Similar to the accounting concept of retained earnings. Both are measures of the firm’s accumulated capital (E&P includes both the accumulated E&P of the corporation since February 28, 1913, and the current year’s E&P).
*Both cash and accrual basis corporations use the same approach when determining E&P.
How to calculate E&P:
Taxable Income
+ Tax exempt income (ability to pay dividend)
+ Dividend received deduction
+ DPAD (domestic production activates deduction)
+ Life insurance proceeds (anything over cash surrender value)
+ Deferred gain on installment sale in year used
+ Carryovers NOL, charitable C/L in year used
+ Income tax refund
+ Organization expenses
+ Increase in LIFO recapture
+ Accelerated depreciation, bonus depreciation, and 179 expense
179 Expense for E&P Use:
1. ADS for depreciation
2. No bonus depreciation (additional 1st year depreciation)
3. 179 expense allowed to take, but must take over 5 years + 80% of 179
Year 2 - 20% of 179
Year 3 - 20% of 179
Year 4 - 20% of 179
Year 5 - 20% of 179
- Future recognition of installment gain (gain recognized in the year)
- Federal income tax paid
- Excess C/L + charitable (year incurred)
- Loss on sale for related parties
- Non-deduction Meals & Entertainment (50%)
- Payment of non-deductible premiums (key life insurance – (minus) increase in the cash surrender value)
- Payment in LIFO recapture
- 20% 179 allowance year
Accumulated E&P is the total of all previous years’ current E&P (since February 28, 193) reduced by distributions made from E&P in previous years.
Allocating E&P to Distributions
1. Current & Accumulated E&P are positive (Net)
Distribution comes first from current E&P on a pro rata basis (dollar amounts), and then accumulated E&P is applied in chronological order
2. Current E&P is positive, accumulated