The most critical factor that Peppertree Corporation must be aware of when planning the distribution is how much they have in retained earnings, which helps determine how much they have in E & P. If they have enough to cover everyone's distributions, it is all taxed as distributions. If not, the amount not covered is treated as return of capital. Qualified dividends are given a reduced tax rate, so it is important that the corporation regularly calculates their E & P, which they can use to plan ahead and make sure the amount paid out is covered by E & P, making it count as dividends. Taking the time to plan out their E & P will ultimately serve the benefit of reducing the amount of taxes the three shareholders will pay in the long run.

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