 Hello and welcome to the session in which we would look at a corporate distribution. Hello and welcome to the session in which we would look at a CPA simulation that deals with corporate distribution. When we have a corporate distribution, we have to determine whether that distribution is a taxable dividend, non-taxable distribution, or something else, usually a capital gain. So those are the three categories, taxable dividend, non-taxable contribution and capital gain. Before sitting for the CPA exam, you have to be very familiar with this topic because you're gonna be tested on this topic heavily. Before I start, I would like to remind you, on my website farhatlectures.com, whether you are an accounting student or a CPA candidate, especially if you are a CPA candidate, I can help you with your CPA preparation. I cannot replace your Becker, your Roger, your Gleim, or your Wiley. What I can do is I can emphasize, I can explain the material in a match, better in-depth manner than these CPA courses. I don't replace them, I wish I can. I can only supplement them. I can add 10 to 15 points to your CPA exam if you add farhatlectures. So here's the risk that you are taking. Are you willing to take your chances? Pay the phenomenal fee for the first month to check out. If my material will help improve your score, help improve your knowledge so you can do better on your CPA exam. That's my challenge to you. If you're willing to take that risk, go ahead because you can cancel. If you don't like it, you can cancel, but you would lose your first month, but you can cancel anytime. Also, if you're an accounting student, I have additional courses, not just taxes, please connect with me on LinkedIn. And on LinkedIn, you can see my LinkedIn recommendation for people who already used my lectures, use my resources to pass the CPA exam. Please like this recording, share it. If it's helping you, it means it might help other people. Follow me on Instagram and Facebook. So let's go ahead and work this exercise. So this exercise is asking us to determine the taxable amount, non-taxable distribution and capital gain in each of the following cases, independent cases. So once a corporation makes a distribution, we have to determine whether that distribution is taxable for the shareholder, not taxable for the shareholder, what's going on? Now from the IRS perspective, guess what? The IRS, they want to treat every distribution as a taxable dividend. Why? Because they want to get their money. They want to get their taxes. Why? Because if it's not a taxable distribution, it might be non-taxable distribution. And for you as the shareholder, you want everything to be considered non-taxable. Non-taxable, it means you don't have to pay taxes. It means tax free. And you would like this. The shareholder would like this. The IRS does not like this. So they would always like to tell you this is a taxable dividend. Then it could be considered a capital gain. So what are the rules? Here's the rules. To the extent that you have earnings and profit, to the extent that you have EMP, okay? So to the extent that you have EMP and you make a distribution, it is taxable. Once you don't have EMP, once your EMP is depleted, you used up all your EMP, your EMP down to zero, any distribution and access to EMP. So this is a greater than EMP, greater than EMP. Then it becomes tax free. It's not really tax free. What they're doing is, no, tax free in a sense, non-taxable distribution. Why is it tax free? It's important to understand why is it tax free. Okay, that's fine. You can memorize it's tax free. The reason it's tax free is because here they are assuming they are returning your basis. So this is called ROC, return of capital or return of basis. If you want to use the word basis, return of basis. So anything that in access to EMP, it's return of basis. Now you don't have unlimited amount of basis. You might have $5 or $5 million or $5,000. Once that return, once your basis depleted, because as they give you back your money in form of distribution, your basis start to go down. Your basis could go down to zero. Remember, your basis could only go down to zero. Once you reach that zero, if they keep on giving you more money in form of distribution, then it becomes capital gain. Again, it goes back to being taxable as capital gain. So those are the three things. First, EMP. Once EMP is depleted, it's tax free. Once the basis are depleted, then it becomes a capital distribution. So let me show you the order here. Taxable, first, to the extent of EMP taxable. Tax free, to the extent of basis, capital gain. Okay, then it becomes capital gain. Once your EMP and basis are depleted. So let's go ahead and look at this exercise and start toward the problem. Corporate EMP of 10,300. This is how much we have earnings and profit. Chairholder basis of 11,300. Distribution of 5,650. So this is how much we distributed. Well, guess what? We have plenty of EMP. Since we have plenty of EMP, that distribution is fully taxable. What is the non-taxable portion? Nothing. What's the capital gain? Nothing. Scenario two, distribution of, now those are independent scenarios, $10,050. Good. Your EMP is 11,050. Excellent. Well, it's not really good from a taxable perspective, but the whole thing is taxable. The whole thing is taxable. 10,050 is taxable. Non-taxable distribution is zero. Capital gain is zero. Now on the CPA exam, remember to fill out those zeros. Remember to fill out those zeros. Don't keep them blank, because filling out those zeros, you tell the AI CPA and the testing software that you understand portion of that is non, portion of that distribution is a non-taxable and non-capital gain. So you wanna make sure you put those zeros. Don't ignore this, okay? Very important, extremely important. You would lose points for nothing and you don't want to lose any points, especially on simulations. Now, could this topic be tested in the form of a multiple choice? Of course, I can turn this into a multiple choice question and ask you, what is the dividend, what's the taxable dividend? And I'll give you four options for what's the non-taxable distribution and one of them will be zero. So this is what I try to tell you always that a simulation is no more than a multiple choice and a multiple choice is no more than a simulation. They are presented differently. Now, sometime what they do is they give you exhibits and the reason they give you exhibits, I understand the fear of exhibits. The reason they give you exhibits is because they assume in the real world, when you go out to the real world, in the real world, you are not going to be presented with a question in a form of a multiple choice or even a simulation like this. In the real world, you're gonna be dealing with forms. You're gonna be dealing with source document with evidence. For example, they might give you a 1099, the IV, 1099 dividend. It has the same information as this problem except it's presented in a form. So you have to be familiar also with the forms. How familiar you have to be? Familiar enough. Now, the people who are working in taxation, like if you are a first year staff accountant working in taxes, you'll be extremely familiar with those forms. But for a college students, well, depending on which textbook they used in college, there are certain textbooks that are called form-based tax textbooks. So they teach you the taxation and using forms. Other textbooks, most textbooks, they don't use form-based. They only teach you the theory. Now, on my website, I try to touch on both. Eventually down the road, I'm planning to start a tax-based form. And the reason is I want to do this is because I have a lot of international students that never set a foot in a U.S. classroom. So they're not familiar with the U.S. tax system. So down the road, that's my plan, is to teach the course from a form perspective. So this way, you are familiar with the practical aspect of it because this is how they trick you if you are an international student. They trick you with those forms. It doesn't matter. Let's keep going. Scenario three. Distribution of 18,200, okay? Of that, we have corporate EMPs, 14,600. Wow. So they gave us more money than the earnings and profit. Well, guess what? Then the first thing is only 14,600. So think of it this way. So they distribute 18,200. We said, okay, 14,600 of it is dividend, taxable dividend. Now, the remaining, well, the remaining is, whatever the remaining is, it's gonna be less than 6,500. The remaining is 3,600. 3,000, whoops. 3,600, the remaining. Well, we have enough shareholder basis. Therefore, the remaining is non-taxable. The remaining is non-taxable. That's it. We accounted for this. 14,600 plus 3,600 equal to 18,200. We're done. So capital gain is zero. The fourth scenario, 33,300 in distribution, we only have 19,100 in corporate EMP. Well, the taxable amount is 19,100. Well, again, let's do this. 33, let's let me erase this. So we're starting with 33,300 of distribution. 33,300. We deducted 19,100. So we still have to account for the remaining. So let's see what the remaining are, because the remaining could be taxable, non-taxable, and the nature of the taxation could be different. So what remained is 13,900. Well, I don't have enough basis of 13,900. I only have enough basis of 12,800. Therefore, I'm gonna consider of the remaining 12,800 as basis, return of basis, which is non-taxable. And after I do that, the remaining is 1,400. The taxpayer will consider this capital gain. It's basically they're given, they gave you back all your money and they're giving you back. They gave you all the profit. They gave you back your basis and now they're giving you more money. It's like you're making a profit from actually selling the stock. There is a capital gain. Now this topic, again, as I told you, it's on my website. I cover this topic, corporate distribution from A to Z. Yes, other CPA companies, they look at this. They review it, but they assume you have a base knowledge. Sometime if you don't have that base knowledge, strong base knowledge, it's gonna seem confusing. It's not that confusing. Check out my website, forhatlectures.com. If not for anything, check out to see how well is your university doing on the CPA exam because I do have this data and I also have other accounting courses. Again, connect with me on LinkedIn, like my YouTube, share them once again. The reason I ask you to like them and share them because if they benefit you, okay, this is a free YouTube, it might benefit other people and it might benefit me. So it's a win-win situation for everyone. Good luck, study hard and your CPA is a long-term investment. It's 20 to 30 years, if not 40 years in your career. Take it seriously. Good luck and study hard.