[Anonymous]

Hey guys, could someone explain this to me? Thanks!

Daystar Corp., which is not a mere holding or investment company, derives its income from retail sales. Daystar had accumulated earnings and profits of $145,000 at December 31, 2006. For the year ended December 31, 2007, it had earnings and profits of $115,000 and a dividends paid deduction of $15,000. No throwback distributions have been made. It has been determined that $20,000 of the current and accumulated earnings and profits for 2007 is required for the reasonable needs of the business. How much is the allowable accumulated earnings credit at December 31, 2007?

A $90,000

B $105,000

C $230,000

D $250,000

Answer (B) is correct.

[jeff]

Sam – I've noticed you've posted a few questions asking for explanations. Is your study software or book offering an explanation?

[Anonymous]

I'm using Becker and the explanation that in their book (from what I understand) is that you need to take:

Beg E&P – Corp. Needs = Excess credit

250,000 – excess credit = Accumulated earnings credit

But this is not giving me the right answer and I just wanted to clarify.

I have no tax experience and I may very well be overthinking a lot of the topics, but I'm just trying to make sure I understand everything. Hopefully someone can clarify this one for me!

[silliepanda]

Did you check online to see if there was an error? I am not saying there is because I didn't try to work it out, but I am just wondering if you looked on the Becker website??

BEC - TOO MANY FAILS TO LIST! July 2015 I WILL GET IT!
AUD - AUG 2015- NEVER PASSED!
FAR - LOST CREDIT
REG - PASSED

[Anonymous]

Well I'm also mainly asking because I've seen in Gleim that they say the accumulated earnings credit is the GREATER of:

250,000 – beg E&P or

current needs of business

which is entirely different from what Becker is saying. I just want to see which is right.

[momto5]

I've been trying to figure this out this afternoon as well and am just as confused. What I find online does not seem to match Becker and there are no corrections listed for page R3-42.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[momto5]

I found the following online. If you use this explanation, then the answer for the problem you posted makes sense.

AEC is not actually a credit. It is a reduction of the accumulated taxable income to reflect the reasonable needs of the business. AEC is the greater of:

General credit. The portion of retained current E&P for reasonable needs of the business, or

Minimum floor. The statutory amount (generally $250,000) less accumulated E&P at the close of the preceding year.

So………….$250,000 – $145,000 (E&P at close of preceding year) = $105,000

This is the greater of the two (needs of business = $20,000)

If you follow Becker's explanation, it seems you'd come up with $125,000 as the answer. [$250,000 – ($145,000 – $20,000)]. Is the question you posted in the Becker materials? If so, which # is it?

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[CPA journey]

according to wiley accumulated earnings credit is allowed for greater of

1) $250000 minus the AEP at end of prior year

or

2) reasonable needs of the business

here the prior year AEP (12/31/2006) is 145000, so AEP credit is greater of = 250000 minus 145000 = $105000 or $25000 (business need)

CPA EXAM - DONE - JULY 2014
ETHICS PENDING - WORK EXPERIENCE- PENDING

[silliepanda]

I briefly read the question and doesn't it say It has been determined that $20,000 of the current and accumulated earnings and profits for 2007 is required for the reasonable needs of the business. So when I attempted the calculation I used $40,000 subtracted from the $145,000 which gives you $105,000. Again, I am not doing REG right now, but that is how I came to the answer. GOOD LUCK!

BEC - TOO MANY FAILS TO LIST! July 2015 I WILL GET IT!
AUD - AUG 2015- NEVER PASSED!
FAR - LOST CREDIT
REG - PASSED

[momto5]

@silliepanda – why $40,000 subtracted from $145,000?

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[CPA journey]

oops, I am sorry I did not read the question properly, it is personal service corporation so it $150,000 not $250000 of minimum credit and I don't know the correct answer for your question, yes it is confusing

similar type of problem in wiley book

2009 AEP = 45000

2010 E &P 115000 and dividend paid deduction 15000

reasonable business need 20000

CPA EXAM - DONE - JULY 2014
ETHICS PENDING - WORK EXPERIENCE- PENDING

[momto5]

The company in the question is involved in retail sales, not a personal service corp. So I still think it is the $250,000 minus the $145,000 AEP at end of prior year = $105,000, which is greater than the $20,000 business needs.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Anonymous]

@momto5 – I am using Becker, but just like you, did research online because Becker's diagram didn't make sense to me. I found the problem online and it appears in both Gleim and Wiley but not in the Becker passmaster questions. Every explanation I find online tells me that it is what you said – the greater of current needs for the business or the 250,000 – beg e&p. That is the only way this answer works out so I think I am going to stick to that. Becker doesn't even mention the whole ‘greater of' situation.

[momto5]

@cpasam101 – Thanks – I agree.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Author]

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