Question

Problem 3-38 (LO. 1,3) In the current year, Tanager Corporation (a calendar year corporation) had operating income of $480,000 and operating expenses of $390,000. In addition, Tanager had a long-term capital gain of $55.000 and a short term capital loss of $40.000 a. Compute Tanager's taxable income and tax for the year. Taxable income: 105,000 Income tax: b. Assume the same facts except that Tanager's long-term capital gain was $15.000. Compute Tanager's taxable income and tax for the Taxable income: Income tax

Answer 1

Ans. Let's understand Tax rules for C Corporation:-

1. As a C Corporation is not pass through entity, so it has to pay its own taxes based on the IRS's corporation tax rate schedule. Which is @21%.
2. In addition to this, there is no preferential tax treatment for long term capital gain in case of C Corporation.
3. Capital Gains are simply added to the corporation's ordinary income and taxed at applicable rate as per IRS schedule.
4. In case of Capital Loss, it is not deductible from ordinary income.
5. Capital Losses can be only offset against capital gain.

Calculation of Taxable Income of Tanager Corporation-

(1) Net Ordinary Business Income (Ordinary Income Less Operating Expense) + (Long term capital gain-Short Term Capital Loss

=$90,000;i.e. ($480,000-$390,000)+($55,000-$40,000)

=$105,000.

Calculation of Income tax= Taxable Income x IRS Corporate Tax Rate

=$105,000 x 21%= $22,050.

(2) Net Ordinary Business Income (Ordinary Income Less Operating Expense) + (Long term capital gain-Short Term Capital Loss only upto value of Capital Gain).

Herein Tanager Corporation Short term capital loss is $40,000 but capital gain (long-term) is only $15000. So Loss can be offset only upto $15,000. So there s taxable income only upto net ordinary business income. Because Tanager's capital gain is utilized in offsetting of capital loss.

So Income Tax will be- Taxable Income x IRS Corporate Tax Rate

=$90000, i.e. ($480,000-$390,000) x 21%

=$18,900