Entity Tax Compliance Planning

TCP — Entity Tax Compliance & Planning Exam: CPA — TCP (Tax Compliance & Planning Discipline) Last Updated: June 2026 --- ## Advanced Corporate Tax Planning ### Earnings and Profits (E&P) E&P determines whether a corporate distribution is a dividend (ordinary income to shareholder) or a return of capital (reduces basis) or a capital gain (when basis is exhausted). E&P ≈ economic income: Adjusted for tax vs. book differences. Current E&P used first; then accumulated E&P from prior years. | Distribution Source | Tax Treatment | |---|---| | Current or accumulated E&P | Dividend (ordinary income) | | Return of basis (after E&P exhausted) | Return of capital (non-taxable; reduces basis) | | Excess over basis | Capital gain | ### Constructive Dividends Non-formal distributions that are taxed as dividends: - Excessive salary paid to shareholder-employee - Below-market loans to shareholder - Personal expenses paid by corporation - Bargain sale to shareholder ### Thin Capitalization / Debt vs. Equity High debt-to-equity ratios may cause IRS to reclassify debt as equity: - Reclassified principal payments become dividends - Reclassified interest deductions are disallowed - Bona fide debt should have arm's-length terms, scheduled repayments, subordination rights --- ## Consolidated Returns ### Eligibility Affiliated group: Common parent + all corporations where parent directly/indirectly owns ≥ 80% of voting power AND 80% of value. All eligible members must join consolidated return (cannot pick and choose). ### Benefits - Intercompany losses offset profits within the group (reduces current tax) - Defer gains/losses on intercompany transactions (deferred intercompany transactions) - Capital loss absorption (one subsidiary's capital gains can use another's losses) ### Intercompany Transactions Gains and losses on transactions between group members are deferred until:…