[Sween]

NINJA Question –

I found this pretty troubling. I have Roger CPA review and Ninja REG MCQ. I noticed the EXACT same question has a different answer for each review program. It is Ninja question number #1865. Each program gives a different explanation as well. I am confused how to put screen shots so I just copied and pasted. Questions are written the exact same.

QUESTION:

At the beginning of the year, Cable, a C corporation, had accumulated earnings and profits of $100,000. Cable reported the following items on its current-year tax return:

Taxable income $50,000
Federal income taxes paid $ 5,000
Charitable contributions carry forward $ 1,000
Capital loss carry forward $ 2,000

What is Cable’s accumulated earnings and profits at the end of the year?

$145,000

$146,000

$148,000

$150,000

ROGERS ANSWER AND EXPLANATION:

146,000

Accumulated earnings and profits (E&P) at the end of the year is equal to accumulated E&P at the beginning of the year plus current E&P. The calculation for current E&P begins with taxable income. Federal income taxes paid reduce current E&P. The charitable contributions carry-forward that was utilized in the current year in computing taxable income increases current E&P, because the charitable contributions were deducted from current E&P in the year the contributions were made. The capital loss carry-forward does not affect current E&P because it was not used to offset capital gains during the year. Thus, current E&P is $46,000 ($50,000 – $5,000 + $1,000). Accumulated E&P at the end of the year is $146,000 ($100,000 + $46,000).

NINJA ANSWER AND EXPLANATION:

148,000

The basic idea behind the calculation of a corporation’s earnings and profits (E&P) is to determine the amount of “earnings” that is available to distribute as dividends.

Cable’s accumulated earnings and profits at year-end are $148,000, computed as follows:

Earnings and profits at beginning of year $100,000
Add: Taxable income 50,000
Less: Federal income taxes paid (5,000)
Add: Excess charitable contribution carryforward 1,000
Add: Excess capital loss carryforward 2,000
Cable’s accumulated E&P at year-end $148,000

The reason the excess charitable contribution carryforward and the excess capital loss carryforward are added back to taxable income is because both were deducted in a prior year to compute the beginning-of-the-year accumulated earnings and profits. This year, when the charitable contribution and capital loss are actually deducted on the tax return, they both must be added back to the calculation for accumulated earnings and profits.

WHICH IS RIGHT? Man, I now have anxiety if there are questions with different answers like this.

FAR - 66 (10/2015)
AUD
REG
BEC

[Namstut]

$148,000 seems to be the correct answer (according to Becker)

The adjustments applied to the starting amount of corporate taxable income can be positive or negative. Any items that have not been reflected in the corporation's taxable income but may have an impact on the corporations's ability to pay dividends are included in the calculation of E&P.

Negative adjustments include:
-Federal Income tax expense
-nondeductible capital losses
-nondeductible charitable contributions

Positive adjustments include
-Carryovers of capital losses that impacted taxable income
-Carryovers of charitable contributions that impacted taxable income.

To rationalize, carryovers of capital losses and charitable contributions from prior year were included in negative adjustments from taxable income to calculate prior year ending E&P so we have to add them back to calculate current year E&P.

In calculation of taxable income only 10% of gross income is allowed for charitable contribution, so the remaining $1,000 was not included in prior year taxable income, therefore, to calculate prior year E&P the company had to deduct the nondeductible amount to reflect actual earnings and profits. Same goes for capital losses. In prior year all but the $2,000 was allowed to be included in taxable income, the company had to “topside” the nondeductible portion of capital losses to get to the actual E&P.

My answer is probably a bit too late, considering that the question was posted almost 3 weeks ago but I hope it helps someone else.

Cheers!

AUD 7/6/16 Passed
BEC 9/3/16
FAR TBD
REG TBD

[Author]

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