The earnings and pro fi ts of a corporation for income tax purposes are the

The earnings and pro fi ts of a corporation for

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The earnings and profits of a corporation for income tax purposes are the same as the retained earnings for 11. corporate financial accounting purposes. In 2010, Supreme Corporation has accumulated earnings and profits of $5,000 and current earnings and 12. profits of $10,000. The corporation distributes $10,000 cash to 50 percent Individual Shareholder A, and property with an adjusted basis of $2,000 and a fair market value of $10,000 to 50 percent Corporate Shareholder B. Both of the shareholders will report a taxable dividend of $10,000. The accumulated earnings penalty tax can be avoided if the corporation promptly pays a dividend upon the 13. determination of a deficiency by the IRS.
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660 CCH Federal Taxation—Basic Principles Chapter 16 © 2010 CCH. All Rights Reserved. A corporation with 15 equal shareholders, all of whom are unrelated, will not be liable for the personal 14. holding company tax even if its $200,000 income is entirely passive (dividends, interest, royalties, etc.) and it pays no dividends to its stockholders. An S corporation which terminates its S status during its taxable year will report its income for the same 15. period as it would have had the election not terminated, but it will fi le two returns for that year, one for a part-year S corporation and one for a part-year C corporation. A corporation’s alternative minimum taxable income would have to be greater than $40,000 before it 16. would be subject to the alternative minimum tax. Talmadge Corporation began operations on January 1, 2010. At that time and throughout all of 2010, 17. Talmadge met all of the requirements to qualify as an S corporation. On April 15, 2010, Talmadge fi led a Form 2553 to elect S corporation status. Talmadge Corporation will be treated as an S corporation for federal income tax purposes for 2009. A partner must report separately his or her distributive share of all of the following partnership items: 18. gains and losses from the sale of capital assets; guaranteed payments to partners; and meal, travel, and entertainment expenses paid by the partnership for a partner. A corporation recognizes a loss when it distributes property that has declined in value. 19. When a shareholder receives a return of capital distribution in excess if the shareholder’s basis in the stock, 20. the excess is taxed as ordinary income to the shareholder. Distributions of cash or property to shareholders are treated as dividends to the extent that the distribution 21. can be made out of current or accumulated earnings and pro fi ts (E&P). A shareholder’s basis in stock generally cannot be reduced below zero, except in cases where the 22. shareholder receives a return of capital distribution that exceeds the basis in the stock. A distribution is considered to be paid from accumulated E&P until exhausted and then to come from the 23.
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