What is 'Accumulated Earnings and Profits'

Accumulated earnings and profits (E & P) is an accounting term applicable to stockholders of corporations. Accumulated earnings and profits are a company's net profits after paying dividends to the stockholders, and serves as a measure of the economic ability of a corporation to pay such cash distributions.

BREAKING DOWN 'Accumulated Earnings and Profits'

End-of-year accumulated earnings and profits is the sum of beginning-of-year E & P and current period E & P less distributions to shareholders during the period. Income and losses are part of a period's E & P, but certain items - recognized for financial accounting purposes but not for income tax reporting purposes - are subject to adjustment. Since E & P is used as a metric for the capacity of a firm to pay distributions, items such as tax-exempt income or nondeductible expenses, which factor into income tax reporting, must be added back or subtracted from the E & P account. Calculating E & P each year is painstaking work for tax departments within a company, but it is very important to keep records current because they come into play for many corporate transactions. For example, a C corporation conversion to REIT requires a thorough accounting analysis of accumulated E & P before it is allowed to proceed.

Is Accumulated E & P the same as Retained Earnings?

No. Even though they may seem synonymous, technically they are different primarily because E & P is determinant in a corporation's ability to fund distributions. A company can lower the amount of its retained earnings via stock distributions or the establishment of a contingency reserve, but they will not negatively impact the company's aforementioned capacity to pay dividends to shareholders.

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