Question

2012 Corporate Tax Rate Schedule (partial)
Taxable Income Greater Than	But Less Than Or Equal To	Tax Is	Of the amount exceeding
$0	$50,000	15%	$0
$50,000	$75,000	$7,500 + 25%	$50,000
$75,000	$100,000	$13,750 + 34%	$75,000
$100,000	$335,000	$22,250 + 39%	$100,000

JKEB Corporation has the following revenues and expenses for the current tax year:

Sales revenue, net of returns . . . . . . . . . . . . . . . . . . . . . . . . . . .        $100,000

Dividend Income (less than 20% owned investees) . . . . . . . . . .         25,000

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           30,000

Normal business expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         40,000

1.      What is JKEB Corporation’s dividends-received deduction for the current tax year?

2.      Assuming that JKEB Corporation’s normal business expenses were $82,000 instead of $40,000, compute its dividends-received deduction for the current tax year.

JKEB Corporation incurred the following capital gains and losses in tax year 2012:

Short Term Capital Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           $ 20,000

Short Term Capital Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (10,000)

Long Term Capital Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 5,000

Long Term Capital Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (28,000)

JKEB’s prior corporate tax returns reflect the following net capital gain/ (loss):

2008 - $6,000 gain

2009—$8,000 gain

2010—($3,000) loss

2011—$1,000 gain

3.      Calculate the net capital gain (loss) for 2012. How is this reported on the 2012 Form 1120?

4.      Calculate the amount of capital loss carryback (if any) to tax years 2008 through 2011 inclusive.

5.      Calculate the amount of capital loss carryforward (if any) to 2013. How will this loss be treated in 2013 (i.e., as a short-term or long-term capital loss)?

JKEB Corporation had the following items during its 2012 tax year:

Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000

Dividends received (from less than 20% owned investees). . . . . . . . . . .      10,000

Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     30,000

Net operating loss carryover from 2011 . . . . . . . . . . . . . . . . . . . . . . . . . .     30,000

Long-term capital gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       8,000

Long-term capital losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      6,000

Short-term capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3,000

Capital loss carryover from 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9,000

Tax Credit…………………………………………………………………    4,500

6.      Compute JKEB Corporation’s 2012 taxable income and income tax liability before tax credits.

7.      What are the nature and amount of any carryovers to 2013?

8.      What is the taxable amount due after using the tax credit?

Answer 1

1.JKEB Corporation's ownership is less than 20% in the investee companies. Therefore, dividends-received deduction would be 70% of the dividends received.

Therefore, dividends received deduction = $25,000 x 70% = $17,500

2.Compute JKEB Corporation's net loss.

Net loss = Sales - cost of sales - business expenses

= $100,000 - $30,000 - $82,000

= $12,000

When the dividends received by JKEB Corporation is added to the net loss, its income becomes $13,000.

In case of company's making loss, dividends-received deduction is 80% of the company's income after adding the dividends received by it.

Therefore, in this case, dividends-received deduction = $13,000 x 80% = $10,400.

3. Net capital gain for 2012 = 20000 - 10000 + 5000 - 28000 = 13000 Loss

It will be reported as long term capital loss.

4. Carryback to 2008 = 0

Carryback to 2009 = 8000

Carryback to 2010 = 0

Carryback to 2011 = 1000

Explanation: Carryback is allowed for up to 3 years and for maximum of gain reported in that year.

5. Carryforward to 2013 = Reported loss - Carryback

= 13000 - 8000 - 1000 = 4000

It will be treated as short term.

Explanation: As per rules, any carryover is treated as short term

6.Taxable income and tax liability before tax credits:
	Amount in $
Net income from operations	150000
Dividends received	10000
Long term capital gains	8000
Short term capital gains	3000
Gross total income	171000
Deductions:
Charitable contributions	30000
Dividends received (70% deduction as JKEB has	7000
less than 20% share in the investee company)
Net operating loss carrover since 2011	30000
Long term capital loss	6000
Capital loss carryover since 2011 - 9000	5000
Total deductions from current year	78000
Taxable income	93000
Tax Liability is $13,750 + 34% in excess of $75,000	19870
7. Carryover to 2013 :
capital loss $9,000 - $5,000 = $4,000
8.Tax Liability after using tax credit :
Tax Liability	19870
Less: Tax Credit	4500
Net Tax Liability	15370