ExpertHard1 markMultiple Choice
CPA · Question 49 · Area V: Entity Taxation
A C corporation has current Earnings & Profits (E&P) of $20,000 and accumulated E&P of ($30,000) deficit at the beginning of the year. The corporation makes a $25,000 cash distribution to its sole shareholder. How much of the distribution is a taxable dividend?
A C corporation has current Earnings & Profits (E&P) of $20,000 and accumulated E&P of ($30,000) deficit at the beginning of the year. The corporation makes a $25,000 cash distribution to its sole shareholder. How much of the distribution is a taxable dividend?
Answer options:
A.
$0
B.
$25,000
C.
$20,000
D.
$5,000
How to approach this question
Nimble Dividend Rule: Dividends come from Current E&P FIRST. If Current is positive, it's a dividend, even if Accumulated is negative.
Full Answer
C.$20,000✓ Correct
C
Distributions are dividends to the extent of Current E&P, then Accumulated E&P. Even though there is an accumulated deficit, the positive Current E&P ($20,000) makes the first $20,000 of the distribution taxable as a dividend.
Common mistakes
Netting Current and Accumulated E&P (only done if Current is negative).
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