I need a little help with the following. THanks! Determine taxable income in eac

Question

I need a little help with the following. THanks!

Determine taxable income in each of the following instances. Assume that the corporation is a C
corporation and that book income is before any income tax expense.
a. Book income of $100,000 including capital gains of $4,000, a charitable contribution of
$2,000, and travel and entertainment expenses of $6,000.
b. Book income of $184,000 including capital losses of $6,000, a charitable contribution of
$24,000, and travel and entertainment expenses of $6,000.
c. Book income of $152,000 including municipal bond interest of $4,000, a charitable
contribution of $10,000, and dividends of $6,000 from a 10% owned domestic
corporation. The corporation also has a $16,000 charitable contribution carryover.
d. Book income of $258,000 including municipal bond interest of $4,000, a charitable
contribution of $10,000, and dividends of $14,000 from a 70% owned domestic
corporation. The corporation has a capital loss carryover of $12,000 and a capital gain of
$5,000 in the current year.

Explanation / Answer

a) The capital gains and charitable contributions are not adjusted in calculation of taxable income and only 50% of the travel and entertainment expenses are deductible therefore 50% of the travel and entertainment expenses need to be added back to book profits for calculating taxable income. The taxable income is calculated as follows:-

Taxable income = Book income + 50% of travel and entertainment expenses

= $100,000+(50% of $6,000) = $100,000+$3,000 = $103,000

b) Capital losses are deductible only to the extent of capital gains, so the $6,000 must be added back. The travel and entertainment expenses are accounted for in the same manner as part (a) and the charitable contributions are limited to 10% of taxable income before the charitable contribution.

In order to calculate the permitted contribution, we need to add back the entire contribution. Thus, income for purposes of determining the limitation is ($184,000 + $6,000 capital losses added back + $3,000 for travel and entertainment expenses + $24,000 for charitable contribution) $217,000. Therefore the allowed charitable contribution is $21,700 (10% of $217,000). Because book income included a $24,000 deduction and only $21,700 is allowed, we need to add back $2,300 ($24,000-$21,700) to arrive at taxable income. The taxable income is calculated as follows:-

Taxable income = Book income+travel and entertainment expenses+Capital losses+Charitable contribution

= $184,000+($6,000*50%)+$6,000+$2,300 = $195,300

c) Non taxable bond interest income need to be deducted from book income for calculating taxable income. To determine the charitable contribution adjustment, we must first determine taxable income before charitable contribution. This amount is [$152,000 - $4,000 for interest - ($6,000*70%) for DRD + $10,000 charitable contribution] $153,800. Thus the corporation is allowed to take an $15,380 ($153,800*10%) charitable contribution. The corporation paid $10,000 in the current year and this amount is included in book income. Thus the corporation can take an additional $5,380 ($15,380-$10,000) in charitable contributions.

The taxable income is calculated as follows:-

Taxable income = Book income-Non taxable interest income-Charitable contribution adjustment-DRD adjustment

= $152,000-$4,000-$5,380-(70% of $6,000) = $138,420

d) There is no adjustment of charitable contribution in this part.

The taxable income is calculated as follows:-

Taxable income = Book income-Non taxable interest income-DRD adjustment-Capital loss carried forward to offset current year capital gains

= $258,000-$4,000-($14,000*80%)-$5,000 = $237,800

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