Question

TSK Corp. operates a document storage company. Scott, the president owns 40% of the stock. In 2018, TSK Corp. had Book Net Income of $800,000.The following items were included in Book Net Income: Dividend income 20,000 Interest income 10,000 Long term capital gain 8,000 Federal tax expense 213,000 Further discussion with Scott revealed the following additional information: The corporation is a calendar year end and uses the accrual method of accounting. The dividends were from a domestic corporation and TSK owns 20 % of this stock. Interest income is from US Treasury Bonds. Book expenses included a $5000 penalty for late payment of Federal taxes, and $12,000 premiums on officer life insurance Book expenses included an estimated bad debt expense of $40,000. Actual bad debt write offs during the year were $19000. Tax depreciation exceeds book depreciation by $14,000. The corporation has a long term capital loss carryover of $10,000 from 2016, On July 1, 2018 TSK Corporation paid a distribution of $120,000 to its shareholders. At December 31, 2017, the corporation had an accumulated deficit in earnings and profits of $ 42,000. Assume a 21% tax rate. Based on the above information compute TSK’s 2018 earnings and profits as of December 31, 2019.

Answer 1

Answer :

Computation of Taxable income of TSK corporation

Particulars	Amount	amount
Net income of TSK corporation		$800000
Less : Dividend income	$20000
Long term capital	$8000	$(28000)
		$772000
Add : Federal tax expense		$213000
		$985000
Additional information
Less : Book expense for penalty	$5000
Estimated bad debts expenses	$40000
Exceeded depreciation	$14000
Dividend	$120000
Accounted deficit	$42000	$(221000)
Net taxable income		$764000

Net taxable income

Tax @21%	764000*21%	$160440
Long term capital gain	$8000 + $10000 = $1800
Tax on LTCG @20%	=$18000 * 20%	$3600
Total tax liability		$164040

Notes points :

• Long term capital gain is taxed at a flat rate of 20%
• Dividend income is not taxable
• Dividend received from domestic company is taxable only if the amount exceeds 10,00,000
• Interest earned on U.S treasury securities is exempt from tax at state and local level but fully taxable at federal level.