However, to calculate E&P, you must know how to calculate taxable income so lets first look at the differences in E&P and taxable transactions. Take a moment and view Chapter 5 Concept Summary 5.1 E&P Adjustments and please post one of the Nature of the Transaction items and explain why that item is either subtracted from or added back to taxable income to arrive at E&P income. For example, Tax-exempt income is not included in taxable income (although it is in book income). However, the corporation received the income, and that income gives the corporation the economic ability to pay a divided so you would add the tax-exempt income back to taxable income arrive at E&P income