A tax attorney at The McGuire Law Firm can assist your corporation regarding corporate issues such as earnings & profits, and what this term means to their business. A tax attorney can help individual business owners regarding certain transactions of which the corporate earnings & profits will play a role. Below is an article related to corporate earnings & profits that we hope you find useful.
From a tax perspective a corporation’s earnings & profits (E&P) do not impact the corporation’s tax liability. Thus, why is the E&P of a corporation important, and what impact does such amount of figure have on the corporation? The reason corporate E&P is so important is because a corporation’s E&P is used to calculate how distributions to shareholders of the corporation are taxed. Corporate distributions are included in a shareholder’s gross income for individual income tax purposes to the extent the distribution constitutes a dividend under IRC Section 301. Internal Revenue Code (IRC) Section 316 defines a dividend as any distribution of property from a corporation to the corporation’s shareholders out of E&P.
Corporate distributions are first treated as a dividend to the extent of the corporation’s E&P. Thereafter, the distributions are treated as a return of capital to the shareholder(s), and thereafter capital gain to the shareholders. Thus, a corporation’s E&P really appears to be a measure of the corporation’s ability to make distributions to the corporate shareholders without returning the shareholder’s capital contribution or other investor investments. This means a corporation’s E&P is a measure that represents a corporation’s ability to make distributions to shareholder’s without disrupting the shareholder(s) basis in their capital investment.
There is no black and white rule, method, statute or law for a corporation to follow when calculating E&P. Due to the important role E&P plays in characterizing corporate distributions as dividends, the allocation of E&P in tax free corporate distributions such as reorganizations are important considerations when corporations consider such transactions and reorganizations. IRC Section 381 deals with the carryover of corporate E&P. For example, what occurs when one corporation with an E&P deficit is acquired by a corporation with accumulated E&P? The IRS has issued regulations section 1.312-10 to address these issues, which will not be discussed in this article.
Under IRC Section 302 certain corporate distributions may not be treated as dividends and thus be given sale or exchange treatment to the taxpayer. These transactions are primarily based on the overall impact to the shareholder’s ownership in the corporation after the transaction has been completed. If a shareholder’s corporate ownership has been reduced or diminished enough, the distribution to the shareholder can be afforded sale or exchange treatment. If the shareholder, after the transaction no longer holds any stock and has completely liquidated their interest, the transaction may be afforded sale or exchange treatment. Certain transactions may also be considered partial liquidations and thus receive sale or exchange treatment.
Corporations with questions regarding their E&P, or considering distributions of property should consult with their CPA and/or their tax attorney and business attorney to discuss the tax implications to the corporation and shareholder. A Denver tax attorney or business attorney at The McGuire Law Firm would welcome the opportunity to discuss such tax matters and issues with any business owner.
You can schedule free consultation with a Denver tax attorney by contacting The McGuire Law Firm. 720-833-7705 or John@jmtaxlaw.com
Offices in Denver, Colorado and Golden, Colorado.