Accumulated Earnings & Profits

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Accumulated E & P DB 2

Accumulated earnings and profits are a company’s net profits after deducting distributions to the stockholders. This paper describes the process and its importance.

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Accumulated E & P DB 2

Accumulated earnings and profits are a company’s net profits after deducting distributions to the stockholders. This paper describes the process and its importance.

In looking at the process and importance of the accumulated earnings and profits, it is best to start with the meaning of the process, which is the measurement of the economic capacity of a corporation to make a distribution to shareholders that, is not a return of capital. Such a distribution results in dividend income to the shareholders to the extent of the corporation’s current and accumulated earnings and profits. (Investopedia explains Accumulated Earnings and Profits) Accumulated earnings and profits are similar to retained earnings, because both terms refer to the net profits of a company after shareholder distributions. However, accumulated earnings and profits also can include reserve accounts, which are not deductible and which can be included when computing taxable earnings.

Earnings and profits are similar in many respects to the accounting concept of retained earnings. The E & P and the retained earnings both measure if the company has accumulated capital. This includes the time since it opened and the current year’s E &P of the company. To compute these numbers you must do it in two different ways. Retained earnings are computed by the financial accounting rules and the E & P is done by the tax laws. It does not define the term earnings and profits. You need to make adjustments to the taxable income to provide a clear measure of the company’s income due to the fact the code does not define the term earnings and profits. There are a number of...