Question

The following information is from Robin Hood Inc.

Advertising Expenses	$ (400,000)
Capital Gains	$ 150,000
Capital Losses (this year)	$ (200,000)
Capital Losses (prior year)	$         -
Cost of Goods Sold	$ (4,000,000)
Dividend "A" income	$    200,000
Dividend "B" income	$      100,000
Dividend "C" income	$         50,000
General and Admin Expenses	$ (1,300,000)
Interest Expense	$ (500,000)
Sales	$9,000,000

1. In addition, Robin purchased equipment at the beginning of the year for $750,000. The equipment has a useful life and a salvage value of 14 years and $50,000 respectively.

2. Robin Hood Inc. has varying ownership interest in the 3 companies listed below and receives dividend income from each company.

                        Robin owns 15% of Company “A”

                        Robin owns 45% of Company “B”

                        Robin owns 90% of Company “C”

3. How much of Robin’s capital gains are taxable?

4. Calculate Robin’s interest expense deduction assuming the following:

Adjusted taxable income                    $ 35,000,000

                Business interest income                     $   1,000,000

                  Business interest expense                   $ 15,000,000

5. How much of the dividend income is taxable?

6. Assuming taxable income is $3,500,000, calculate Robin’s tax liability.

1. Robin wishes to deduct the maximum amount of depreciation on its tax return. How much can it deduct on the equipment?

2. How much of the dividends received from Company A is taxable to Robin?

3. How much of the dividends received from Company B is taxable to Robin?

4. How much of the dividends received from Company C is taxable to Robin?

5. How much of Robin's capital gains will be taxable this year?

6. Calculate Robin's interest expense deduction.

7. Assuming taxable income is $3,500,000 calculate Robin's tax liability?

Answer 1

Required a.

Capital gain = $150,000

Capital Loss =$ (200,000)

Net Capital loss = $50,000

This loss shall be carried over by the corporation to 3 years backward and 5 years forward to be deducted against capital gains during those years.

Thus there is no taxable capital gain during the year.

Required b.

Business interest expense deduction is limited to the sum of :

• Business interest income
• 30% of the adjusted taxable income of the taxpayer
• Floor plan financing interest of the taxpayer for the taxable year.

In the given question,

Maximum Business interest deduction allowed = Business interest income + 30% of the adjusted taxable income of the taxpayer

= $1,000,000 + 30% of 35,000,000

= $11,500,000

Actual Business interest expense = $15,000,000

Therefore, business interest deduction allowed for the current year = $11,500,000

However, this rule does not apply to small business with average annual gross receipts of $26 MM or less during the preceding 3 years.

Required c.

Company Name	Percentage of holding	Dividend received	Dividend received reduction (%)	Dividend received reduction ($)	Taxable dividend
Dividend "A" income	15%	200,000	50%	100,000	100,000
Dividend "B" income	45%	100,000	65%	65,000	35,000
Dividend "C" income	90%	50,000	100%	50,000	0
Total	135,000

Taxable dividend = $135,000

It is assumed that Robin Hood Inc. prepares a consolidated tax return with Company C and thus 100% of the dividend is eliminated. If Consolidated tax return is not prepared, the deduction would be limited to 65%.

Required d

Taxable Income = $3,500,000

Corporate tax rate = 21%

Tax Liability = $3,500,000 * 21% = $735,000

Required e

Per Section 179, a corporation can elect to allow 100% expensing of the cost of the qualified business use property in the year of purchase.

Thus, Max deduction allowed = $750,000 * 100% = $750,000

Required f

• Dividend from A , taxable dividend = $100,000
• Dividend from B , taxable dividend = $35,000
• Dividend from C , taxable dividend = $0

It is assumed that Robin Hood Inc. prepares a consolidated tax return with Company C and thus 100% of the dividend is eliminated. If Consolidated tax return is not prepared, the deduction would be limited to 65%.and taxable dividend would be = $17,500