[needhelpnow]

Q: 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?

Answer : $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).

My Question is: Aren’t we supposed to subtract $1K Charitable contribution instead of adding it back in? Over here it’s adding it.

[Gatorbates]

The key is “Current” year.

The contribution carry forward was a result of a “prior” year's contributions. It was used in coming up with THIS year's taxable income …. however, it wasn't part of this year's earnings/business activities. Therefore, it cannot be used to calculate “current” E&P, thus, you have to add it back in.

Make sense?

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[needhelpnow]

@Gatorbates I see what you are saying. So because it was used last year for charitable deduction, and because it was in excess, you add it back in to Accum E&P?

And had the question been, what is the taxable income? What would have been the answer?

Thank you again guys!

[nolan7120]

I just came across an extremely similar question while studying for REG and it confused the hell out of me.

Can anyone give a good explanation of what is going on here? I don't understand the charitable contributions and net capital loss subtraction. Thanks!

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
Current year charitable contributions in excess 1,000
of 10% limitation
Net capital loss for current year 2,000

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

The requirement is to determine Cable’s accumulated earnings and profits (AEP) at the end of the year. Cable’s
beginning AEP of $100,000 would be increased by its earnings and profits for the current tax year (CEP). The starting point
for computing Cable’s CEP would be its taxable income of $50,000. Taxable income would be reduced by the $5,000 of
federal income taxes paid, and would also be reduced by the $1,000 of current year charitable contributions which would
not be allowed as a deduction in computing taxable income because of the 10% of taxable income limitation. Additionally,
CEP would be reduced by the current year net capital loss of $2,000 which would not be allowed as a deduction in
computing current year taxable income because a corporation cannot deduct a net capital loss. As a result, Cable’s CEP
is $50,000 – ($5,000 + $1,000 + $2,000) = $42,000, and its AEP at the end of the current year is $100,000 + $42,000 =
$142,000.

FAR (6/9/16) - 81

[Author]

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