If the FMV is greater than the corporation's tax basis in the property, then it must recognize the distribution as a constructive sale, where the FMV minus the tax basis is equal to the corporation's profit, which is added to current E&P.
However, the distribution of the property reduces E&P by the fair market value of the property.
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Whether that distribution is taxable depends on whether the distribution is classified as a dividend or a return of capital.
A return of paid-in capital is not taxable, since it is not a profit.
Accumulated E&P is a tax term for what, under financial accounting, would be referred to as retained earnings.
Although they are basically the same, there may be some differences because of the statutory adjustments.
Based on the above table, you, as a shareholder who owns 10% of the company, will receive 10% of the $800,000 total distribution.
Your taxable dividend and your nontaxable return of capital are calculated thus:) of the property is the amount that is distributed.
While the payment of the nontaxable stock dividend does not change corporate E&P, taxable stock dividend distributions decrease E&P by the FMV of the stock.
Besides dividends, shareholders can receive compensation as employees of the corporation, or they may receive loans from the corporation in which they have to pay a reasonable interest rate.
The remaining percentage of the dividend will be considered a nontaxable return of capital.
However, if the corporation does not earn a profit for the current year, dividends can still be paid out of the accumulated E&P, even if a corporation has a current deficit.
A corporation can pay a dividend either out of current E&P or accumulated E&P.