Unknown Accumulated Earnings and Profits

Technical topics regarding tax preparation.
#1
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Client has been a S corporation for as long as they’ve been a client and for a couple of years prior. Client was a C Corp for many years prior to conversion to S Corp. If for some reason the previous tax preparer is unable to provide the accumulated earnings and profits while the company was a C, how would one compute the AE&P if prior tax returns are unavailable for review?
 

#2
lucyko  
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I'm guessing this might have been a relatively small C-Corp. Nonetheless, you might check with client and ask him to check with Treasurer ,Controller, Accountant ,Bookkeeper,or whoever to attempt to locate the old C returns . What about other financial records that might be available such as general ledger and/or financial statements?
 

#3
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Actually, I wish it was relatively small as we’d likely come with another solution. AAA is a few million and we are going to blow by that number. At this point, we are conservatively assuming E&P is large enough to absorb the remaining distribution amount, even though that’s not the most ideal result. We just can’t justify a smaller amount at this point. Entity has been around for decades and has been through local CPAs and regional firms and I’m not sure that info has tagged along with each transfer, and as you might imagine, has relied on accountants to keep historical data. At this point, I’m thinking a POA going back to inception and requesting records from IRS may be best option. Never gone back that far before, so not sure that will be successful.
 

#4
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At this point, I’m thinking a POA going back to inception and requesting records from IRS may be best option.

Not a good option because it’s not going to work. Go back to the last C-corp return, locate Retained Earnings and use that number. If there is any Treasury Stock on the Balance Sheet, see if you can round up historical cap tables on redemptions. Otherwise, forget redemptions. (I realize redemptions could have been booked in a wide variety of ways. When I book them, I always post to Treasury Stock for this very reason: If they are kept in one place, it’s easy to trace things back). I’ve been involved in audits in similar situations. IRS approach here could be that everything distributed in excess of AAA is E&P. But if you can point to the Retained Earnings number on the Final F1120, that should work. It has for our firm in conjunction with reasonable IRS auditors. And if you can reduce E&P by redemptions, even better. That would just be gravy at this point. The long and short, Pennyweight, is not to be penny wise, pound foolish. As Ben Franklin once said, “A penny saved from the clutches of E&P is a penny earned.”
 

#5
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What have you been showing on page 2 of the 1120S, where you are supposed to show accumulated earnings and profit amount? Do you have a return from a previous preparer that shows an amount? I think that line is gone for 2018 - not sure why.
 

#6
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I think that line is gone for 2018 - not sure why.

Because it got moved to the M2. There’s a new column for it. And that number may or may not be presented…and if it is, it may or may not be right.
 

#7
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Jeff-Ohio wrote:As Ben Franklin once said, “A penny saved from the clutches of E&P is a penny earned.”


I believe the actual quote is:
“A penny saved is two pence clear ... from the clutches of E&P.” - Ben Franklin 1737
https://www.fi.edu/benjamin-franklin/7- ... never-said

He was also talking about an English penny so we're getting pretty deep here - tax jurisdiction, exchange rates, time value of money, and the fact that there wasn't even an income tax for over another 150 years. Franklin would have been much more concerned with the tariff taxes on tobacco and sugar. I think if we remember Yogi Berra's wise words, "a nickle ain't worth a dime anymore," that retained earnings would be a valid jumping off point for E&P.
 

#8
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We should probably keep in mind Yogi's other quote:
"90% of tax law is half knowing the history."
~Captcook
 

#9
Wiles  
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pennyweight13 wrote:AAA is a few million and we are going to blow by that number... Entity has been around for decades and has been through local CPAs and regional firms...


AAA is wrong and AE&P is unknown. This sounds like every new S-Corp (that was a prior C-Corp) I have taken in. I am sure there are numbers in OAA & PTI, too, that are meaningless.

You are going to need to get that last C-Corp tax return to calculate approx. AE&P. Then button up AAA with a whole lot of assumptions about historical stuff never happening. Make a pretty reconciliation and it will look golden, even thought it may be completely wrong.
 


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