A calendar-year C corp distributes $30,000 to its sole shareholder on July 1, 2025. Accumulated E&P at January 1 is $40,000. Current-year E&P is a deficit of $60,000. Shareholder basis is $5,000. Get the waterfall wrong and you misreport $10,000 of dividend, $5,000 of basis recovery, and $15,000 of capital gain.
Form 1120 is due the 15th day of the 4th month after year-end. Calendar-year corporations file by April 15; a fiscal-year corp uses the same 4th-month rule for its own year. Form 7004 buys an automatic 6-month extension of time to file but not of time to pay.
Failure-to-file: 5% of unpaid tax per month or part month, capped at 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $510 (2025) or 100% of the unpaid tax.
Failure-to-pay: 0.5% per month, capped at 25%. When both apply in the same month, the failure-to-file is reduced by the failure-to-pay so the combined monthly hit is 5%.
Common mistakes
- Computing E&P using MACRS or §168(k) bonus depreciation. E&P uses ADS straight-line with bonus excluded; the difference is an add-back.
- Letting a negative accumulated E&P balance offset positive current E&P. A current E&P dividend stands on its own; the accumulated deficit is ignored.
- Applying the DRD taxable-income limit when the full DRD would create or increase an NOL. The NOL exception allows the full DRD.
Bottom line
- Form 1120 due 15th day of the 4th month after year-end (April 15 for calendar year); flat 21% rate. Form 7004 grants an automatic 6-month extension.
- Failure-to-file penalty 5% per month (max 25%; 2025 minimum $510 or 100% of tax due, whichever is less).
- §301 waterfall: current E&P first, then accumulated E&P (both dividends), then tax-free return of basis, then capital gain. A negative accumulated balance cannot offset positive current.
- Property distributions make the corporation recognize gain (not loss) and give the shareholder a FMV basis.
Exam shortcut
Waterfall mnemonic: C-A-B-G. Current E&P, Accumulated E&P, Basis recovery, Gain. Walk every distribution question down this ladder in order. DRD trick: always test the NOL escape. Compute tentative DRD and the taxable-income cap; if the full DRD pushes taxable income below zero, take the full DRD and book the NOL. Estimated tax: $500 trigger, 4 installments, $1M flag.
The full lesson (about 2,868 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 3
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