Final answer:
When assets are sold, gain or loss is recognized for both taxable income and E&P purposes, reflecting the requirement for tax recognition and the economic reality of the transaction across both tax and book calculations.
Step-by-step explanation:
When computing taxable income and Earnings and Profits (E&P), taxpayers often use different depreciation methodologies which result in different tax and book bases in assets. When a taxpayer sells such assets, the correct answer to the question is: A) Gain or loss is recognized for both taxable income and E&P purposes. This is because the Internal Revenue Code requires the recognition of gains or losses for tax purposes, and similarly, the calculation of E&P must reflect the economic reality of the transaction by recognizing gain or loss.
For example, a company might use straight-line depreciation for E&P calculations but an accelerated method like MACRS (Modified Accelerated Cost Recovery System) for taxable income. When the asset is sold, there may be a difference between the book value (used for E&P) and the tax basis (used for taxable income). Both the gain or loss for tax purposes and the adjustment to E&P must account for this difference to correctly reflect the transaction's impact.
Corporate income tax, capital gains tax, and depreciation are all critical concepts in understanding tax implications on income and asset disposals.