distributions

distributions - Nonliquidating Distributions I Regular...

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Nonliquidating Distributions I. Regular Dividend Distribution A) Taxed as ordinary income to shareholder to extent of Earnings and Profits 1) If insufficient E&P, dividend in excess of E&P is treated as a return of capital (i.e. basis is reduced until it is zero, then remainder is cap gain). 2) If distribution is not a regular dividend, t/p must be able to prove otherwise. B) Earnings & Profits 1) Definition- represents the corporations economic ability to pay a dividend without impairing capital. 2) Calculation: Taxable Income + Nontaxable Income (e.g. municipal interest) - Non-recognized losses or expenses (e.g. fed taxes, net cap losses) +/-Depreciation adjustment * Current E&P * For E&P purposes, it has been determined that straight line depreciation using the alternate recovery period is a better indicator of the corporation’s ability to pay dividends. E.g. if MACRS depreciation equals $5,000 and S-L using alt. rec. period equals $3,000, then the adjustment is + 2,000. (Reverses is - adj.) 3) Current E&P vs. Accumulated E&P- for the current tax year, current E&P is calculated as shown above. Accumulated E&P is the summation of all the previous years (excluding the current year) E&P less dividends paid in those years. C) Distributions reduce E&P 1) Dividends are first deemed to be made from CE&P and then AE&P. Dividends reduce E&P but not below zero, that is dividends can not create a deficit in E&P (see A) above). E.g. if current E&P is $10,000 and Accumulated E&P is ($20,000). A dividend of $8,000 is all considered ordinary dividend (CE&P is $2,000). A dividend of $12,000 is considered $10,000 ordinary dividend and $2,000 ROC (CE&P is zero). 2) Current E&P is deemed to be earned pro-rata for the year.
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E.g. Joe Corporation distributes $50,000 during the year ( $30,000 June 30 th , and $20,000 Dec. 30 th ) and corporation has CE&P of $40,000 and AE&P of $5,000. 1 st distribution-$20,000 from CE&P; $5,000 from AE&P; $5,000 ROC. 2 nd distribution-$20,000 from CE&P. (This is particularly important if shares are traded during the year) 3) If there is a deficit in CE&P (from a loss) and a positive balance in AE&P, accounts are netted at time of distribution .
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