Question

From the e-Activity, differentiate between the treatment of S corporation distributions from corporations having no earnings and profits, and corporations having accumulated earnings and profits. Suggest the most significant reason for the difference in the treatment of distributions. Justify your response.

Answer 1

A distribution from an S corporation with no earnings and profits is not included in gross income while a distribution from an S corporation with earnings and profit is treated in the same manner as long as it does not exceed the accumulated adjustments account. Any distributions above and beyond the accumulated adjustments account will be treated a dividend to the extent that it does not exceed the accumulated earnings and profits of the S corporation. According to Forbes the difference in the treatment of distributions exists to assure that double taxation does not occur. It is the major difference between C and S corporations. C corporations must be taxed on earnings and profits while an S corporation’s income is not taxed a second time

corporations having accumulated earnings

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 after paying dividends to the stockholders, and serves as a measure of the economic ability of a corporation to pay such cash distributions.

the most significant reason

Without profit what you’ve created is a really, really hard job. In fact, one of the saddest things I encounter is a small business owner working their tail off with no profit to show and compensation far below what someone else would ever suggest they do the work for.

So many businesses get fixated on growth, but revenue growth without profit is simply more work. Set goals for profit levels and make decisions based on growing profit.

Profit is the measure of the return on your investment. Profit is how you build something you can sell. Few others are crazy enough to buy your job, but profit is the demonstration that yours is more than a job.

You must start to make profit, over above your fair market wage, a primary goal for the immediate and long term future health of your business.