Madison Corporation reported taxable income of $400,000 in year 2 and accrued federal income taxes of $84,000.Included in the year 2 taxable income computation were regular depreciation of $200,000 (E&P depreciation is $60,000), first-year expensing under §179 of $100,000, and a net capital loss carryover of $20,000 from year 1.The corporation's current earnings and profits for year 2 would be:

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Quizplus · Accepted Answer

Earnings and profits (E&P) are calculated by adjusting taxable income for items that differ for tax and E&P purposes. Starting with the taxable income of $400,000, we adjust for the differences in depreciation ($200,000 tax vs. $60,000 E&P, so add back the difference of $140,000), §179 expensing (add back $100,000 since it's not deducted for E&P), and the net capital loss carryover (add back $20,000 since losses can't reduce E&P). Therefore, the calculation is $400,000 + $140,000 + $100,000 + $20,000 = $660,000.

Madison Corporation Reported Taxable Income of $400,000 in Year 2