Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a current year transaction treated as an installment sale of $25,000. The corporation'scurrent earnings and profits for 20X3 would be:

Question

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Starting with taxable income of $500,000, we need to adjust for the various items that were not included in the computation:

- Disallowed meals and entertainment expense of $2,000: This expense is disallowed for tax purposes, so it needs to be added back to taxable income. Adjusted income: $502,000.

- Tax-exempt income of $1,000: This income is not subject to tax, so it needs to be subtracted from taxable income. Adjusted income: $501,000.

- Deferred gain on installment sale of $25,000: This gain is not included in taxable income for the current year, so it needs to be added back. Adjusted income: $526,000.

Now that we have the adjusted taxable income, we can calculate the corporation's current earnings and profits (CEP) using the following formula:

CEP = Taxable income + Nontaxable income - Deductible expenses

Using the adjusted figures, we get:

CEP = $526,000 + $1,000 - $2,000 = $525,000

Note that the federal income tax paid of $170,000 is not relevant to the calculation of current earnings and profits.

Grand River Corporation Reported Taxable Income of $500,000 in 20X3