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's current E&P for 20X3 would be:

Question

Quizplus · Accepted Answer

E&P is calculated by starting with taxable income and making adjustments for items that are not included in the calculation of taxable income. In this case, we need to add back in the disallowed meals and entertainment expense of $2,000 and the tax-exempt income of $1,000. We also need to subtract the deferred gain on the current-year transaction treated as an installment sale of $25,000. 
Starting with taxable income of $500,000 and adding back $2,000 and $1,000 gives us $503,000. Subtracting $25,000 gives us E&P of $478,000. 
But we also need to take into account the federal income tax paid of $170,000. Subtracting this from E&P gives us a final answer of $354,000.

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