Accumulated Earnings and Profits
What Is Accumulated Earnings and Profits (E&P)?
Accumulated earnings and profits (E&P) is an accounting term applicable to stockholders of corporations. Accumulated earnings and profits are a company's net profits in the wake of paying dividends to the stockholders, filling in as a measure of the economic ability of a corporation to pay such cash distributions.
How Accumulated Earnings and Profits (E&P) Works
End-of-year accumulated earnings and profits are the sum of beginning-of-year E&P and current period E&P less distributions to shareholders during the period. Income and losses are part of a period's E&P, yet certain things — perceived for financial accounting purposes however not for income tax reporting purposes — are subject to adjustment.
Since E&P is utilized as a measurement for the capacity of a firm to pay distributions, things, for example, tax-exempt income or nondeductible expenses, which factor into income tax reporting, must be added back or deducted from the E&P account.
Computing E&P every year is careful work for tax departments inside a company, yet it is vital to keep records current since they become possibly the most important factor for the majority corporate transactions. For instance, a C corporation conversion to a real estate investment trust (REIT) requires an intensive accounting analysis of accumulated E&P before it is permitted to continue.
Special Considerations
Most corporations, explicitly those that are C corps, must keep up with E&P accounts to determine fundamental tax treatment. They don't need to report E&P however they must realize the E&P amount for determining the tax treatment of a transaction. So, it's a lot more straightforward to keep up with the accumulated E&P balance versus setting up the calculation following several years.
The tax laws don't frame how to work out E&P and the cycle isn't really simple. The E&P for any year begins with the adjustable taxable income for that year. Essentially all transactions influence a company's E&P. Certain activities can influence E&P too, for example, mergers.
Different types of revenue past taxable income can help E&P, for example, tax-exempt income and installment sales. Things diminishing E&P incorporate cash expenses that are paid however perhaps not taxable, for example, charitable contributions and capital loss carryforwards.
Accumulated E&P versus Retained Earnings
Despite the fact that they might appear to be equivalent, technically they are different principally on the grounds that E&P is determinant in a corporation's ability to fund distributions. A company can bring down the amount of its retained earnings by means of stock distributions or the foundation of a contingency reserve, however they won't negatively impact the company's previously mentioned capacity to pay dividends to shareholders.
Features
- Accumulated earnings and profits (E&P) are net profits a company has accessible subsequent to paying dividends.
- Retained earnings are technically not quite the same as accumulated E&P in light of the fact that E&P is a determinant in a corporation's ability to fund distributions.
- This figure is calculated as E&P toward the beginning of the year plus current E&P minus distributions to shareholders during the current period.
