Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?
A) $200,000
B) $208,000
C) $250,000
D) $258,000
E) None of these.

Question

Quizplus · Accepted Answer

Earnings and Profits (E&P) is a measure of a corporation's ability to pay dividends, which is calculated differently from taxable income. For the purpose of E&P calculation, organizational expenses are generally not deductible in the year incurred but rather must be capitalized and amortized over a period of years. However, for tax purposes, a corporation can elect to deduct up to $5,000 of organizational expenses in the first year and amortize the rest over 180 months. Since Falcon Corporation deducted $8,000 of its organizational expenses in calculating its taxable income, this amount needs to be added back to the taxable income to determine the current E&P. Therefore, Falcon's current E&P is its taxable income of $250,000 plus the $8,000 deduction for organizational expenses, totaling $258,000.

Falcon Corporation Ended Its First Year of Operations with Taxable