What does accumulated earnings and profits mean on the CPA exam?
Accumulated earnings and profits. The C corporation earnings and profits an S corporation carries into S status. A distribution runs the accumulated adjustments account first, then a dividend out of this, and only then basis.
Defined against Sec. 1368.
Which CPA exam sections use accumulated earnings and profits?
Accumulated earnings and profits appears in 6 CPA exam sections: AUD, BAR, FAR, ISC, REG, TCP.
What is the difference between accumulated earnings and profits and accumulated adjustments account?
AAA tracks the S corporation’s own undistributed taxed income. E&P is the C corporation residue carried into S status. A distribution from an S corporation with E&P runs AAA first, then dividend out of E&P, then remaining basis, then capital gain. The dividend layer never touches stock basis, which is the step candidates lose. (IRC Sec. 1368)
Related terms
- earnings and profits: A corporation's cumulative economic capacity to pay a distribution out of earnings rather than out of capital.
- accumulated adjustments account: The running total of an S corporation's post-election taxable income less distributions.
- C corporation: A corporation taxed in its own right under subchapter C.
- S corporation: A corporation that elects to be taxed like a partnership, so profit is taxed once in the shareholders' hands.
- online analytical processing: Processing optimized for querying accumulated data across many dimensions, as a data warehouse does.
- due diligence: The specific inquiry, documentation and record-keeping a preparer must perform before claiming certain credits or head-of-household status.