Question

Briefly define the term “earnings and profits.” Why do we need to know about this concept of earnings and profits? If we start with “taxable income” can you provide a few of the adjustments that you would need to make in order to get to “earnings & profits” of the Corp?

Answer 1

Earnings are the overall revenue that are generated by sales from operations by company which account for most of the revenues of the company. It is income from the core business of the company. Apart from revenues from operations it also includes income from other operations.

While profits are residual amount left after deduction of cost from the revenues and other extraordinary expenses as well as incomes. It is calculated after adjustment of tax as well as operating as well as non operating expenses.

Adjustments which are needed to be adjusted from taxable income to arrive at earnings of the company are amount of taxes, amount of extraordinary items, deferred taxes etc.