Tax Analysts provides news, analysis, and commentary on tax-related topics, including corporate income tax on earnings and profits.

Earnings and profits are not defined in the internal revenue code, but are an important calculation necessary for computing a corporation’s ability to pay dividend tax. A corporation has both current-year E&P and accumulated E&P. A company can have current-year E&P even if it has a deficit in accumulated earnings and profits.

Earning and profits play an important part in structuring cross-border transactions and E&P in a parent corporation can be increased by income or distribution from a controlled foreign corporation (CFC). Section 959, exclusion from gross income of previously taxed earnings and profits, provides E&P distribution ordering rules for previously taxed income (PTI) and non-PTI for distributions from CFCs out of earnings and profits. Under section 956, investment of earnings in United States property, and the subpart F rules of the code some distributions from E&P are taxable. If a company does not have any E&P, its distribution may be a return of capital instead of a dividend. If its basis in its stock has been reduced to zero, any further distribution is capital gain.

Recurring issues and controversies in this area include U.S. multinational corporations (MNCs) holding foreign earnings and profits offshore to maintain deferral on income earned overseas and avoid U.S. taxation on a worldwide basis. Numerous proposals have been put forth to end this lockout effect, including moves to a territorial tax system with a lower transition tax, or toll tax, on previously untaxed foreign income.

Tax Analysts consistently and promptly publishes all relevant developments regarding current and accumulated earnings and profits, including recurring issues involved. To stay up to date on all tax-related topics, subscribe to Tax Notes Today Federal.