Question

Distributions come out of E&P in the following order:

a. Current, then accumulated
b. Accumulated, then current

Answer 1

In the context of corporate distributions to shareholders, earnings and profits are distributed starting with current E&P followed by accumulated E&P.

Step-by-step explanation:

Understanding Distributions and Earnings and Profits (E&P)

The subject at hand pertains to the distribution of earnings and profits (E&P) in the context of corporate distributions to its shareholders. In the corporate tax world, distributions are typically treated as coming from the corporation's current E&P before its accumulated E&P. This means if a corporation has both current year earnings and accumulated earnings from previous years, it will distribute its current year earnings first before tapping into the earnings that have been accumulated over prior years.

The question refers to the sequential order in which distributions are made regarding E&P. The correct order of distribution is current E&P and then accumulated E&P. This sequence is essential for tax purposes as it can influence the tax treatment of the distributions received by the shareholders.

Answer 2

Distributions from a corporation to its shareholders are first applied against current Earnings and Profits (E&P), and then against accumulated E&P. This affects the tax consequences for the shareholder receiving the distribution.

Step-by-step explanation:

The student is asking about the order in which distributions come out of Earnings and Profits (E&P) for a corporation. The question pertains to the tax treatment of distributions made by a corporation to its shareholders. These distributions are considered first to come out of the corporation's current E&P, and then, any excess is applied against accumulated E&P. This ordering is important because it affects the tax implications for the shareholder receiving the distribution.

Current E&P refers to the net income of a corporation for the current year, while accumulated E&P refers to the net income from previous years that has not been distributed to shareholders. When a corporation issues a distribution, the IRS assumes it comes from the current E&P first. Once the current E&P has been exhausted, any remaining distribution is deducted from the accumulated E&P.