Question

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XYZ is a calendar-year corporation that began business on January 1, 2017. For 2018, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Exhibit 16-6.

XYZ corp.	Book Income
Income statement
For current year
Revenue from sales	$	40,000,000
Cost of Goods Sold		(27,000,000	)
Gross profit	$	13,000,000
Other income:
Income from investment in corporate stock		300,000	1
Interest income		20,000	2
Capital gains (losses)		(4,000	)
Gain or loss from disposition of fixed assets		3,000	3
Miscellaneous income		50,000
Gross Income	$	13,369,000
Expenses:
Compensation		(7,500,000	)4
Stock option compensation		(200,000	)5
Advertising		(1,350,000	)
Repairs and Maintenance		(75,000	)
Rent		(22,000	)
Bad Debt expense		(41,000	)6
Depreciation		(1,400,000	)7
Warranty expenses		(70,000	)8
Charitable donations		(500,000	)9
Meals		(18,000	)
Goodwill impairment		(30,000	)10
Organizational expenditures		(44,000	)11
Other expenses		(140,000	)12
Total expenses	$	(11,390,000	)
Income before taxes	$	1,979,000
Provision for income taxes		(720,000	)13
Net Income after taxes	$	1,259,000	14

Notes:

1. XYZ owns 30 percent of the outstanding Hobble Corp. (HC) stock. Hobble Corp. reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method and it recorded its pro rata share of HC's earnings for the year. HC also distributed a $200,000 dividend to XYZ.
2. Of the $20,000 interest income, $5,000 was from a City of Seattle bond issued in 2017 that was used to fund public activities, $7,000 was from a Tacoma City bond issued in 2015 (a private activity bond), $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account.
3. This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as §1231 gain).
4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).
5. This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are officers).
6. XYZ actually wrote off $27,000 of its accounts receivable as uncollectible.
7. Tax depreciation was $1,900,000.
8. In the current year, XYZ did not make any actual payments on warranties it provided to customers.
9. XYZ made $500,000 of cash contributions to qualified charities during the year.
10. On July 1 of this year XYZ acquired the assets of another business. In the process it acquired $300,000 of goodwill. At the end of the year, XYZ wrote off $30,000 of the goodwill as impaired.
11. XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes.
12. The other expenses do not contain any items with book-tax differences.
13. This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes.

Estimated tax information:

XYZ made four equal estimated tax payments totaling $480,000. For purposes of estimated tax liabilities, assume XYZ reported a tax liability of $800,000 in 2017. During 2018, XYZ determined its taxable income at the end of each of the four quarters as follows:

Quarter-end	Cumulative taxable income (loss)
First	$	350,000
Second	$	800,000
Third	$	1,000,000

Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

d. Complete XYZ’s Form 1120, page 1 to 6.

(Input all the values as positive numbers. Use 2018 tax rules regardless of year on tax form.)

Answer 1

6. The charitable contribution deduction is limited to $222,040 which is 10% of taxable income before the charitable contribution, DRD, or DMD ($2.220400 x 10%). 7. Because XYZ owns 30% of HC, it is entitled to an 80% DRD. Its DRD is $160,000 ($200,000 dividend x 80%). b. XYZ's regular income tax liability is $594,442 ($1.748.360 x 34%). c. XYZs Schedule M-1 is as follows: Schedule M-1 1 Net income per books 2 Federal income tax provision 3 Excess of capital losses over capital gains 4 Income subject to tax not recorded on books this year (itemize) $1,259000 720,000 4,000 5 Expenses recorded on books this year not deducted on this return b. Contributions carryover c. Travel and entertainment Stock option compensation (incentive stock options) Bad debt expense 277,960 9,000 200,000 14,000 Warranty expense Goodwill impairment 70,000 20,000 36,400 6 Add lines 1 through 5 $2,610,360 7 Income recorded on books this year not included on this return a. Tax exempt interest Income from investment in corporate stock 12000 100,000 8 Deductions on this return not charged against book income this year 500,000 b. Contributions carryover Domestic production activities deduction 90,000 9 10 Add lines 7 and 8 Income (line 28, page 1)-line 6 less line 9 702,000 $1.908,360 Note that line 10 does not reconcile to XYZ's taxable income. It reconciles to taxable income before the dividends received deduction of $160,000 XYZs taxable income is $1,748,360 ($1,908,360-160,000)

XYZ's alternative minimum tax liability is $O, computed as follows: T Calculation Taxable income or loss before NOL 1,748,360 e items activity bond 7,000 stments ation adjustment 450 enative minimum taxable 1,964.810 (AMTI) t: Exemption (completely T base 1,964,810 tative minimum tax 962 Regular income tax 594,442 $ 1,748,360 x 34%) tive minimum tax f positive. fication to ription Tax-exempt interest income from tax exempt bond that funds a public activity (as +$5,000 to private activity) izational expenditures that were expensed during the year 7.600 12,600 9,450 otal E Adjustment ($12,600 total x 75%)