ExpertHard1 markMultiple Choice
CPA · Question 42 · Area 4: Entity Taxation
A C Corporation has Accumulated E&P of (,000) (deficit) at the beginning of the year. Current E&P for the year is ,000. The corporation distributes ,000 to its sole shareholder. How is the distribution taxed?
A C Corporation has Accumulated E&P of (,000) (deficit) at the beginning of the year. Current E&P for the year is ,000. The corporation distributes ,000 to its sole shareholder. How is the distribution taxed?
Answer options:
A.
0 Dividend; ,000 Return of Capital
B.
,000 Dividend; ,000 Return of Capital (to extent of basis)
C.
5,000 Dividend; ,000 Return of Capital
D.
,000 Dividend
How to approach this question
Check E&P states: 1. Current (+) / Accum (+) -> All Div. 2. Current (+) / Accum (-) -> Div to extent of Current (Nimble Dividend Rule). 3. Current (-) / Accum (+) -> Net them at date of distribution.
Full Answer
B.,000 Dividend; ,000 Return of Capital (to extent of basis)✓ Correct
,000 Dividend; ,000 Return of Capital (to extent of basis)
When Current E&P is positive and Accumulated E&P is negative, distributions are dividends to the extent of Current E&P. The deficit in Accumulated E&P is ignored for this calculation.
Common mistakes
Netting positive current E&P with negative accumulated E&P.
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