I have a question where you have to compute the distribution to accumulated earnings and profits when E&P has been exhausted. The questions gives you the accumulated earnings and profits which is $200,000.
It says that the Corp has $300,000 of gross income, $280,000 of expenses from ordinary business operations and also has $10,000 of tax-exempt state municipality bonds. This information is to calculate the E&P.
I didn't contemplate in my calculation the $10,000 of tax-exempt interest ($300,000-$280,000) because of the exclusion for tax purposes. But the correct answer says that I have to include it for the calculation ($300,000-$280,000+$10,000).
I'm still confuse as the tax-exempt interest in this question. Why it is included in the calculation if is tax exempt? Let me know your feedback. Thank you.