Question

Z Corporation has taxable income of $100,000 in 2020 after properly accounting for all the following items on the tax return. In reviewing the tax workpapers you discover the following notations. Indicate for each of the following transactions, what necessary adjustment to taxable income that is needed to determine the current E & P.

Label your answers A-E and indicate the dollar amount for each adjustment. If the adjustment is a negative one, enclose the amount in brackets. If no adjustment is needed, state None.

A. During 2020, the company paid $21,000 in federal income taxes

B. During 2020, the company elected to expense $40,000 under Section 179   

C. In 2020, the company received $1,000 in tax-exempt income

D. In 2020, the company paid $6,000 in business meals.

E. In 2020, the company had $5,000 in capital gains. From 2019, they had a $4,000 capital loss carryforward which they could utilize in 2020.

Answer 1

A. Federal income tax - None

(If it is already reduced in books then the adjustment will be +21,000)

No adjustment is required because, federal income tax is not deductible expense

B. Section 179 - (40,000)

(If it is already taken as expense while calculating the taxable income of $100,000, then no adjustment would be required)

Section 179 is a deduction where the entire cost of asset is allowed as deduction in the year of purchase.

C. Tax exempt income - (1,000)

(If tax exemption was already taken while calculating the taxable income of $100,000 then no adjustment)

D. Business meals - (3,000)

Only 50% is deductible as per IRS, so 50% of 6,000

(If it is completely claimed then we would add 3,000 to income)

E. Carried forward loss - (4,000)

(If capital gains are not shown in E&P then for computing taxable income, we will add 1,000 (5,000-4,000) to the E&P)

Carried forward loss of 4,000 will be set off against current year capital gain