C corp liquidating dividend
Let’s consider the following example: ABC, an S corporation, has approximately 0,000 of C corporation accumulated earnings from years preceding its election to be taxed as an S corporation.
These earnings are referred to as C corporation earnings and profits, or E&P for short.
The remaining ,000 is treated as first a tax-free return of the shareholder’s initial stock investment of ,000, and the remaining ,000 represents payment for the sale of the shareholder’s stock, normally treated as capital gain.
To summarize, the existence of C Corporation E&P simply means that distributions from the corporation in excess of undistributed previously taxed income (AAA) will be considered an ordinary dividend to the extent of C Corporation E&P.
Theoretically, E&P represents the corporation’s ability to pay dividends.
A distribution is treated as a dividend (and taxed to the shareholders as ordinary income) to the extent the corporation has accumulated E&P.
The shareholder’s stock basis is ,000 consisting of an initial capital investment of ,000 plus ,000 of undistributed S corporation income (AAA) on which the shareholder has paid already paid tax.
Assume the corporation makes a distribution of ,000.
The first and most important question is whether a distribution is really a dividend, and E&P is the measuring stick used in this scenario.This is by far the most important ramification of having C corporation earnings and profits.The E&P concept is imperative to the double taxation system imposed on C corporations.S corporation shareholders are taxed on income whether or not the earnings are distributed.When distributions are actually made from an S corporation, they are assumed to come first from income that has already been taxed, but has remained undistributed as retained earnings.