Chance Corporation has a $20,000 deficit in earnings and profits as of January 1,2017.During 2017,the corporation has current earnings and profits of $40,000 and makes a $70,000 cash distribution to its shareholders.What part of the distribution is taxable as dividend income to Chance's shareholders?
A)$- 0 -
B)$20,000
C)$30,000
D)$40,000
E)$70,000

Question

Quizplus · Accepted Answer

The distribution is taxable as dividend income to the extent of the current earnings and profits. Since Chance Corporation has $40,000 in current earnings and profits, $40,000 of the distribution is taxable as dividend income. The deficit in earnings and profits from prior years does not affect the current year's dividend distribution.

Chance Corporation Has a $20,000 Deficit in Earnings and Profits