Question

Discuss the E & P calculation. What is the importance of this calculation?

Answer 1

Solution :

Earnings & Profit (E&P) is a measuring tool for a corporations economic ability to pay dividend to its shareholders without impairing capital. Every company needs to maintain an updated E & P statement regarding the tax and dividend decisions of the company. Profit calculation also states the earning capacity of the business and helps in making the future expansion plans for increasing those earnings. Investors are also interested in knowing the earnings from the business and their share of profits from it. In general a companies current years E & P is calculated by making adjustments to its taxable income for the year for items that are treated differently for E&P purpose.

Every corporation is required to maintain accounting of current years E&P and also the accumulated. Distribution over here means dividends distributed to its shareholders.

It is similar to Retained earnings but often not the same.

The calculation of E & P begins with the taxable income and various adjustments are made to it by adding or subtracting the adjustments.

Following are the adjustments which are added to the calculation :

Add previously excluded items and certain deductions to taxable income including:

Muni bond interest

Excluded life insurance proceeds

Federal income tax refunds

Dividends received deduction

Domestic production activities deduction.

Following the items which are subtracted :

Subtract certain nondeductible items:

Related-party losses

Expenses incurred to produce tax-exempt income

Federal income taxes paid

Key employee life insurance premiums (in excess of increase in cash surrender value)

Fines, penalties, and lobbying expenses

There are certain E&P adjustments which shift effect of transaction from the year of inclusion in or deductions from taxable income to the year of economic effect namely ., charitable contribution carryovers, NOL (Net Operating Loss ) carryovers or capital loss carryovers. The gains and losses from property transactions generally effect E&P calculation only to the extent of tax recognition.