Question

Alpha Corporation has been in business for two years. It incurred the following items last year (Year 1): Gross profits on sales 240000 Operating expenses 100000 Long-term capital gain 8000 Short-term capital loss 12000 Alpha reported the following items this year (Year 2): Gross profits on sales 600,000 Operating expenses 165,000 Long term capital gain 10000 Compute Alpha’s taxable income and tax liability for Year 1 and Year 2.

Answer 1

Year 1: Taxable income, $127,400; Tax liability, $32,936.
Year 2: Taxable income, $401,850; Tax liability, $136,629.
These amounts are calculated as follows:
Year 1:
Gross profit on sales	$240,000
Minus: Operating expenses	(100,000)
Qualified production activities income	$140,000
Long-term capital gain	8,000
Short-term capital loss allowed ($4,000 carries over)	(8,000)
Taxable income before the
U.S. production activities deduction	$140,000
U.S. production activities deduction ($140,000 x 0.09)	(12,600)
Taxable income	$127,400
Tax liability [$22,250 + ($27,400 x 0.39)]	$ 32,936
Year 2:
Gross profit on sales	$600,000
Minus: Operating expenses	(165,000)
Qualified production activities income	$435,000
Long-term capital gain	10,000
Short-term capital loss carryover	(4,000)
Taxable income before the
U.S. production activities deduction	$441,000
U.S. production activities deduction ($435,000 x 0.09)	(39,150)
Taxable income	$401,850
Tax liability ($401,850 x 0.34)	$136,629