Question

Whitlaw Corporation has $150,000 of gross profit on sales, operating expenses of $60,000 (excluding cost recovery), $4,000 dividend income from a one-percent-owned corporation, a $10,000 capital gain and $25,000 capital loss, tax depreciation of $40,000 (total financial accounting depreciation is $22,000),a $5,000 charitable contribution, and a net offering loss carryover from the prior year of $10,000.

a. What is Whitlaw's taxable income?

b. What is Whitlaw's income tax for 2018?

c. Complete a schedule M-1 or a facsimile for the corporation.

Answer 1

: a. $36,800 taxable income. $150,000 – $60,000 + $4,000 - $40,000 - $10,000 NOL = $44,000 income before the dividend received and charitable contribution deductions.

                 The charitable contribution deduction is limited to $4,400 ($44,000 x 10%). The DRD is $2,800 ($4,000 x 70%). $44,000 - $4,400 - $2,800 = $36,800 taxable income.

                 (The $10,000 capital gain offsets $10,000 of the capital loss; the other $15,000 of the capital loss cannot be deducted this year, but may be carried back three and then forward five years to offset gains in those years.)

                 b. $5,520 income tax ($36,800 x 15%).

                 c. Schedule M-1:

                     Net income per books = $150,000 gross profit – $60,000 operating expenses + $4,000 dividend income + $10,000 capital gain - $25,000 capital loss - $22,000 financial depreciation - $5,000 charitable contributions - $5,520 income tax = $46,480 net income per books.

                 $46,480 net income per books + $5,520 income tax + $15,000 ($25,000 capital loss - $10,000 capital gain) excess capital loss + $600 ($5,000 - $4,400) excess charitable contributions - $18,000 ($40,000 additional tax depreciation - $22,000 financial depreciation) excess tax depreciation = $49,600 taxable income before special deductions. $36,800 taxable income + $10,000 NOL + $2,800 DRD = $49,600 taxable income before special deductions.