MGMT 127B Lecture Notes - Lecture 5: Dividend Tax, Capital Appreciation
Document Summary
A corporation determines whether it should classify a cash distribution as a dividend by dividing its total earnings and profits into two segments. Current e&p: represents profits earned this year. Accumulated e&p: represents profits earned during all prior years. If either current e&p or accumulated e&p is a positive number, a distribution is a dividend up to that positive amount. If current e&p is -3k and accumulated e&p is +3k and the corporation distributes. 1k to its sole shareholder: the entire 1k distribution is a dividend because accumulated e&p is a positive amount. If current and accumulated are both negative, the entire distribution is just a nontaxable cost recovery, not a dividend. There is a dividend (this is taxed at regular dividend rates of 25%) to use up all of e&p. There is now a nontaxed return of capital- it is tax free!
