Impact of Dividends and Capital Gains on Earnings and Profits (E&P)

Impact of Dividends and Capital Gains on Earnings and Profits (E&P)

Question 1

Dividends and capital gains usually have a significant effect on E&P (earnings and profit). Payment of dividends is generally deducted from the profit of a company.  Dividends are usually paid after taxation. Dividends, therefore, reduce a company’s earnings after tax. However, shareholders must get a return for their investment in a firm. This investment is, therefore, pegged on the profit made by the firm. If a firm makes a loss, deferral of tax is usually done or even enjoys a tax shield in the specific financial year. In such a financial year, the dividends will not be paid. Dividends are also taxed leading to a rise of double taxation. The taxable rate applied changes from one state to another or among countries. The government may also find it necessary to change from one financial year to another. Capital gains are also taxed at the same rate as dividends (Yang, 2004). Since capital gains occur in excess of the E&P, they have a tendency to lower the earnings and profit.

Question 2

The ramification of IRS section 312 dealings with earnings and profit recommends a reduction in the earnings and profit of a firm, which should be based on the basis of adjustment for the property being distributed, the amount (principal) of obligations, and the total amount of money involved. This is based on the general rule. Reduction of earnings and profit is done when the distribution of stock is done; fair market value is the basis applied (CFR, 2019). On the matter of disposition of stock, no adjustment is made to the earnings and profits of a firm. However, adjustment can only be done if the disposition is a redemption.

References

Yang, James G. S. & Chang, Chiaho. (2004). Tax strategies for tax-advantaged dividends and capital gains. The CPA Journal, 74(3), 53-55. Retrieved from ABI/INFORM Global. (Document ID: 586571801). (http://ezproxy.sjcme.edu:2048/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=f5h&AN=12464661&site=ehost-live)

26 CFR § 1.312-1 – Adjustment to earnings and profits reflecting distributions by corporations. (n.d.). Retrieved April 11, 2019, from https://www.law.cornell.edu/cfr/text/26/1.312-1

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Answer each question separately

#1 What are the effects of dividends and capital gains on E&P?
Yang, James G. S. & Chang, Chiaho. (2004). Tax strategies for tax-advantaged dividends and capital gains. The CPA Journal, 74(3), 53-55. Retrieved from ABI/INFORM Global. (Document ID: 586571801). (http://ezproxy.sjcme.edu:2048/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=f5h&AN=12464661&site=ehost-live)

Impact of Dividends and Capital Gains on Earnings and Profits (E&P)

The CPA Journal archives are freely available – here is a direct link to the article: http://archives.cpajournal.com/2004/304/essencials/p53.htm

#2 What are the ramifications for the business of IRC Section 312 with Treasury Regulations 1.312 dealing with Earnings and Profits?