Pheasant Corporation ended its first year of operations with taxable income of $225,000. At the time of Pheasant¡¯s formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Pheasant claimed an $8,000 deduction for the organizational expenses. What is Pheasant¡¯s current E & P?
To determine Pheasant Corporation's current E & P (Earnings and Profits), we need to follow a step-by-step process:
Step 1: Start with taxable income
Pheasant Corporation's taxable income for the year is $225,000.
Step 2: Add back non-deductible expenses
Organizational expenses of $50,000 were incurred at the time of Pheasant's formation. However, only $8,000 of these expenses were deducted for tax purposes. Therefore, we need to add back the remaining $42,000 ($50,000 - $8,000) of non-deductible expenses to the taxable income.
$225,000 + $42,000 = $267,000
Step 3: Adjustments for tax-exempt income or non-deductible expenses
If there are any tax-exempt income or non-deductible expenses that were previously deducted for tax purposes, we need to adjust them. In this case, there is no information provided regarding any such adjustments.
Therefore, Pheasant Corporation's current E & P is $267,000.
To calculate Pheasant Corporation's current E&P (Earnings and Profits), we need to understand a few key concepts.
1. Organizational Expenses: These are expenses incurred during the formation of a corporation, such as legal fees, incorporation fees, and accounting fees.
2. Taxable Income: This is the income that is subject to tax after deducting allowable expenses and exemptions.
3. E&P (Earnings and Profits): E&P is a measure of a corporation's ability to distribute earnings to its shareholders. It is calculated separately from taxable income.
Now, let's calculate Pheasant Corporation's current E&P:
1. Start with taxable income: Pheasant Corporation's taxable income for the first year is $225,000.
2. Deduct organizational expenses: While Pheasant claimed a $8,000 deduction for the organizational expenses on its tax return, for the purpose of calculating E&P, we need to add back this deduction. So, we add $8,000 back to the taxable income.
Taxable income after adding back organizational expenses: $225,000 + $8,000 = $233,000
3. Subtract any non-deductible expenses: Some expenses that are deductible for tax purposes may not be deductible for E&P purposes. If there are any non-deductible expenses, subtract them from the taxable income.
Since there is no information provided about any non-deductible expenses, we assume there are none to consider.
4. Determine current E&P: Now, we have the adjusted taxable income. This adjusted taxable income represents Pheasant Corporation's current E&P.
Current E&P: $233,000
Therefore, Pheasant Corporation's current E&P is $233,000.