Question

Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000, and gain of $50,000 from an installment sale that took place in 20X1. The corporation's current earnings and profits for 20X3 would be:

A) $965,000
B) $1,015,000
C) $675,000
D) $625,000

Answer 1

The corporation's current earnings and profits for 20X3 would be $1,015,000, which is calculated by adding back the dividends received deduction and the net capital loss carryover to the reported taxable income.

Step-by-step explanation:

To calculate the corporation's current earnings and profits for 20X3, one must adjust the taxable income to reflect specific items that affect earnings and profits (E&P) differently than they affect taxable income. The starting point is the corporation's taxable income of $1,000,000. Then, we make the following adjustments:

• Add back the dividends received deduction of $5,000, since it reduces taxable income but not earnings and profits.
• Add back the net capital loss carryover of $10,000, as capital losses do not reduce E&P in the year to which they are carried.
• The gain from the installment sale of $50,000 that occurred in 20X1 will not be added back since it's already included in the taxable income of $1,000,000 for 20X3, which implies it affects both taxable income and E&P the same way.

Once these adjustments are made, the current earnings and profits can be calculated:

$1,000,000 (taxable income) + $5,000 (dividends received deduction) + $10,000 (net capital loss carryover) = $1,015,000

Therefore, the correct answer to the question is B) $1,015,000.