What deductions are allowed for taxable income purposes but denied for E&P?

ACC 455 WEEK 3

 

 

 

Week 3 Discussion Questions

 

How does a corporation compute earnings and profits (E&P)? What income is deferred to a later year when computing taxable income but is included in E&P in the current year? What deductions are allowed for taxable income purposes but denied for E&P? DQ: 3.1

 

 

 

Distinguish between current and accumulated earnings and profits. Why is it important to make this distinction? DQ: 3.2

 

 

 

The corporation owns a building with a $160,000 adjusted basis and $120,000 fair market value. The company has earnings and profits of $200,000. Is it more advantageous for the company to sell the property and distribute the sales proceeds to its shareholders or distribute the property to its shareholders and let them sell the property? Why? If you were a shareholder, what would be most advantageous to you? DQ: 3.3

 

What is a stock redemption? What are some reasons for redeeming stock? Why are some redemptions treated as sales and others as dividends? DQ: 3.4

 

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C:3‑3 Stan and Susan, two calendar year taxpayers, are starting a new business to manufacture and sell digital circuits. They intend to incorporate the business with $600,000 of their own capital and $2 million of equity capital obtained from other investors. The company expects to incur organizational and start-up expenditures of $100,000 in the first year. Inventories are a material income-producing factor. The company also expects to incur losses of $500,000 in the first two years of operations and substantial research and development expenses during the first three years. The company expects to break even in the third year and be profitable at the end of the fourth year, even though the nature of the digital circuit business will require continual research and development activities. What accounting methods and tax elections must Stan and Susan consider in their first year of operation? For each method and election, explain the possible alternatives and the advantages and disadvantages of each alternative.

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