Question

Compute HC Inc.’s current-year taxable income given the following information relating to its 2019 activities. Also, compute HC’s Schedule M-1 assuming that HC’s federal income tax expense for book purposes is $30,000. Use Exhibit 16-6.

• Gross profit from inventory sales of $310,000 (no book–tax differences).
• Dividends HC received from 28 percent-owned corporation of $120,000 (this is also HC’s pro rata share of the corporation’s earnings).
• Expenses other than DRD, charitable contribution (CC), and net operating loss (NOL), are $300,000 (no book–tax differences).
• NOL carryover from prior year of $12,000.
• Cash charitable contribution of $50,000.

Answer 1

Solution

HC, Inc's taxable income is $ 11,640 computed as follows:

Description	Book Income (Dr)Cr	Book-tax Adjustments	Taxable Income (Dr) Cr
(Dr)	Cr
Gross profit	310,000			310,000
Other income:
Dividend income	120,000			120,000
Gross income	430,000			430,000
Expenses:
Business expenses other than DRD,CC,NOL	(300,000)			(300000)
Federal income tax expense	(30000)		30000
Total expenses before charitable contribution,NOL,DRD deduction	(330,000)			(300,000)
Income before charitable contribution,NOL and DRD	100,000			130,000
NOL carryover from prior year		(12,000)		(12,000)
Taxable income for charitable contribution limitation purposes (modified taxable income)				118,000
Charitable contributions(limited to 10% of modified taxable income for tax)	(50,000)		38,200	(11,800)
Taxable income before DRD				106,200
Dividends received deduction(DRD)		(94,560)		(94,560)
Book/ Taxable income	50,000	(106,560)	68200	11,640

Deduction is the lesser of (1) full dividends received deduction of $96,000 (120,000 x 80%) or (2) $94,560 [805 x ( $106,200 + 12,000 NOL carryover] taxable income before the DRD, NOL)

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