Question

Timpanogos Inc. is an accrual-method calendar-year corporation. For 2018, it reported financial statement income after taxes of $1,152,000. Timpanogos provided the following information relating to its 2018 activities:

Life insurance proceeds as a result of CEO’s death	$	200,000
Revenue from sales (for both book and tax purposes)		2,000,000
Premiums paid on the key-person life insurance policies. The policies have no cash surrender value.		21,000
Charitable contributions		180,000
Cost of goods sold for book and tax purposes		300,000
Interest income on tax-exempt bonds issued in 2017		40,000
Interest paid on loan obtained to purchase tax-exempt bonds		45,000
Rental income payments received and earned in 2018		15,000
Rental income payments received in 2017 but earned in 2018		10,000
Rental income payments received in 2018 but not earned by year-end		30,000
MACRS depreciation		55,000
Book Depreciation		25,000
Net capital loss		42,000
Federal income tax expense for books in 2018		500,000

Required:

1. Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income and identify all of the adjustments necessary to arrive at taxable income.
2. Identify each book-tax difference as either permanent (P) or temporary (T).
3. Complete Schedule M-1 for Timpanogos.
4. Compute Timpanogos Inc.’s tax liability for 2018.

Answer 1

a)	Timpanogos Inc. taxable income
	Description	Book Income	Book Adjustments		Taxable Income
		(Dr.)/Cr.	(Dr.)	Cr.	(Dr.)/Cr.
		Amount $	Amount $	Amount $	Amount $
	Revenue	2000000			2000000
	Less: Cost of goods sold	-300000			-300000
	Gross Profit	1700000			1700000
	Other Income
	Life Insurance proceeds of death of CEO	200000	-200000		0
	Interest Incom	40000	-40000		0
	Rent Income	25000	-10000	30000	45000
	Gross Income	1965000			1745000
	Expenses:
	Interest expenses on exempt bond	-45000		45000	0
	Net Capital Loss	-42000		42000	0
	Depriciation	-25000	-30000		-55000
	Life Insurance Premium	-21000		21000	0
	Expenses other than DRD, Charitable contribution, Net operating losses and domestic production activities deduction	-133000			-55000
	Federal Income Tax	-500000		500000	0
	Total expenses before DRD, Charitable contribution, Net operating losses and domestic production activities deduction	-633000			-55000
	Income before CC, NOL, DRD & DPAD	1332000			1690000
	Charitable contribution limited to 10% of modified taxable income	-180000		12000	-168000
	Book/Taxable Income	1152000	-280000	650000	1522000
b)	Identification of each book-tax difference as either permanent (P) or temporary (T).
	Timpanogos Inc. taxable income
	Description	Book Income	Book Adjustments		Taxable Income
		(Dr.)/Cr.	(Dr.)	Cr.	(Dr.)/Cr.
		Amount $	Amount $	Amount $	Amount $
	Revenue	2000000			2000000
	Less: Cost of goods sold	-300000			-300000
	Gross Profit	1700000			1700000
	Other Income
	Life Insurance proceeds of death of CEO	200000	-200000 [P]		0
	Interest Income	40000	-40000 [P]		0
	Rent Income	25000	-10000 [T]	30000 [T]	45000
	Gross Income	1965000			1745000
	Expenses:
	Interest expenses on exempt bond	-45000		45000 [P]	0
	Net Capital Loss	-42000		42000 [T]	0
	Depriciation	-25000	-30000 [T]		-55000
	Life Insurance Premium	-21000		21000 [P]	0
	Expenses other than DRD, Charitable contribution, Net operating losses and domestic production activities deduction	-133000			-55000
	Federal Income Tax	-500000		500000 [P]	0
	Total expenses before DRD, Charitable contribution, Net operating losses and domestic production activities deduction	-633000			-55000
	Income before CC, NOL, DRD & DPAD	1332000			1690000
	Charitable contribution limited to 10% of modified taxable income	-180000		12000 [T]	-168000
	Book/Taxable Income	1152000	0	0	1522000
c)	Schedule M-1 for Timpanogos
	Schedule M-1                   Reconciliation of Income (Loss) per Books With Income per Return
	Note: The corporation may be required to file Schedule M-3 (see instructions).
	1 Net income (loss) per books . . . . .	1152000	7 Income recorded on books this year
	2 Federal income tax per books . . . .	500000	not included on this return (itemize):
	3 Excess of capital losses over capital gains	42000	a Tax-exempt interest $40,000
	4 Income subject to tax not recorded on books this year (itemize): Rental Income	20000	b Other (itemize): Life Insurance Proceeds $ 200,000	240000
	5 Expenses recorded on books this year not		8 Deductions on this return not charged
	deducted on this return (itemize):		against book income this year (itemize):
	a Depreciation . . . . $		a Depreciation . . $30,000
	b Charitable contributions $ 12,000		b Charitable contributions $
	c Travel and entertainment $		c Other (itemize):	30000
	d Other (itemize): INS PREM $21,000		9 Add lines 7 and 8 . . . . . . .	270000
	INT EXP $45,000	78000
	6 Add lines 1 through 5 . . . . . . .	1792000	10 Income-line 6 less line 9 . . . .	1522000
	Income as per Schedule M-1 is $1,522,000
d)	Timpanogos Inc.’s tax liability for 2018
	Computation of Tax Liability
	Taxable Income	1522000
	Tax Rate	34%
	Tax Amount	517480