Question

1. In 2019, Nighthawk Corporation, a calendar year C corporation, has $5,620,000 of adjusted taxable income and $168,600 of business interest income. Nighthawk has no floor plan financing interest. The business interest expense for the year is $2,248,000.

a. Assume that Nighthawk has average gross receipts for the prior three-year period of $30,400,000.

Determine Nighthawk's current-year deduction for business interest.
$_______________________

b. Assume that Nighthawk has average gross receipts for the prior three-year period of $18,000,000.

Determine Nighthawk's current-year deduction for business interest.
$_____________________

2.

Prance, Inc., earns pretax book net income of $1,639,500 in 2018. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation by $163,950. Prance reported no other temporary or permanent book-tax differences. The relevant U.S. Federal corporate income tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%.

Enter below the 2018 end-of-year balance in Prance's deferred tax asset and deferred tax liability balance sheet accounts.

If an amount is zero, enter "0". If required, round your answer to nearest whole value.

a. Deferred tax asset account balance $0 b. Deferred tax liability account balance $

Answer 1

limitation on business interest expenses is of a maximum 30% of "adjusted taxable income".

1. maximum deduction for business interest expense for the current year. ( limited to 30% of adjusted taxable income)

adjusted taxable income = $5,620,000 thus maximum business interest expense allowed = 30% of $5,620,000= $1,686,000. thus for the current year deduction of $1,686,000 is allowed. balance amount ($2,248,000-$1,686,000)=$562,000 will be carried forward.

although the average gross receipt can affect the question but because of lack of information, we will continue assuming that adjusted total income in both the cases is the same that is $5,620,000, thus this will lead to the same conclusion of business interest expense being =$1,686,000.

2. calculation of deferred tax asset and liability.

deferred tax asset or liability comes into being because of different tax liability as calculated using accounting rules and tax liability calculated by the tax authorities, it could be overpaid or underpaid and thus can be an asset or a liability.

calculation:

Prance, Inc., earns a pretax book net income of $1,639,500 in 2018 depreciation allowance as per income tax exceeds book depreciation by $163,950.

tax liability as per books=$1,639,500*21%=$3,442,950.

tax liability as per tax authorities $1,639,500-163950=1,475,500*21%=$3,098,655

thus a deferred tax asset of $344,295($3,442,950 - 3,098,655)