At the start of current year, Indiego corporation (a calender year taxpayer) has accumulated E and P of $240000. Indigo's current E and P is $160000, and at the end of the year, it distributes $440,000($220,000) to its equal shareholders, Sarah and Mason.their basis in the stock is $ 8000 for sarah and $32000 for Mason.
How is the distribution treated for tax purpose?
Asnake from USA
Asnake, As per IRS of USA, after distribution of dividend, tax will be paid on dividend income by shareholder. As per the white paper of Federal Income tax
For your knowledge, I want to tell accumulated E and P means accumulated earning and profit. At the end, accumulated earning and profit is just like retained earning. Because we charged income tax on the corporation when corporation obtained net profit. After adjusting the corporation income tax and distribution of dividend, we transfer it to balance sheet's reserve and surplus.
Simple Formula is
Opening Accumulated E and P as per opening balance sheet
Add + Current Earning and Profit
Less - Distribution of Dividend from Current E and P
Less - Distribution of Dividend from Accumulated E and P
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Accumulated E and P at the end of year which will transfer to balance sheet
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