Corporate Distributions Video - ExamPrep.ai CPA Review

Lesson: Corporate Distributions

In this lesson, Nick Palazzolo, CPA, unravels the complexities of corporate distributions with an intuitive "filling up buckets" concept. By breaking down the intricacies of taxable dividends, return of capital, and capital gains, Nick paints a vivid picture, transforming the theoretical into practical understanding. Using the delightful analogy of a faucet filling various buckets, he creatively demonstrates how different types of distributions are treated tax-wise, from current and accumulated earnings and profits to shareholder stock basis. Nick also ensures to forewarn about common exam pitfalls and encourages hands-on practice with both straightforward and trickier scenarios involving deficits in accumulated earnings and profits. Engaging with these examples is like adding color to financial concepts, making this a lesson that not only enlightens but also entertains.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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We're getting into one of my favorite topics. I think it's a different way to think about something than we've seen from a lot of different topics throughout the exam. We're dealing with corporate distributions and we can think of corporate distributions as filling up buckets. Now we've got an example on the next slide which I think will be a better illustration, but generally think of a faucet and this faucet has water and it's filling up buckets. Now bucket one is 0.1 here, then 0.2 is the second bucket, then we've got 0.3 and 0.4. Then I'll use actual numbers on the next slide to illustrate how this works, but we're first off using the current earnings and profits from a corporation. Those are taxed as taxable dividends, so any money, any income earned this year, current earnings and profits from the current income statement this year, taxable dividends. Accumulated earnings and profits, those are earnings and profits from last year, the year before, anything we've got in our vault of essentially retained earnings, but that's a financial accounting term, overflows goes into the next bucket. If we've got enough to distribute there, then if we're continually distributing more and this bucket gets filled up, so we don't have any amounts left from accumulated earnings and profits, we're going to overflow into the next bucket. Then from there, the amounts are going to go to the extent of the shareholder's stock basis and this is considered a non-taxable return of capital because it's like you're just getting your money back and it's going to reduce your basis. Then this is kind of the infinite bucket. This bucket goes on forever. Any distributions when there's no earnings and profits or basis left are considered taxable capital gains. Keep in

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