Question

Grand Corporation reported pretax book income of $795,000. Tax depreciation exceeded book depreclation by $595,000. In addition, the company recelved $311,000 of tax-exempt municipal bond Interest. The company's prior-year tax return showed taxable Income of $74,000. Compute the company's current income tax expense or benefit. urrent income tax benefit

Answer 1

Tax depreciation v/s Book Depreciation

Book depreciation is recorded in the books to show the income of the company as per the relevant act which guide the company. On the other hand Tax Depreciation is the depreciation calculated as per the taxation act so as to provide a uniform rate of depreciation to all the tax paying entities (assessee). There may be difference between both and the difference in tax liabilities arising due to these is recorded as deferred tax.

In the Present Problem

Assessee : Grand Corpotration

Assessment Year: XXXX-XX

Current Years Pre-Tax Book Income: $795,000

Difference Between Tax Depreciation and Book Depreciation : $595,000

Income after Depreciation Adjustment: $795,000-$595,000 = $200,000 (because depreciation is in nature of expense and tax depreciation is more than book depreciation so we have subtracted the difference amount.)

Income Includes $311,000 tax exempt municipal bond interest. So this will not form part of the taxable income. Although this will be reported separately in tax return.

To sum up,

Particulars Amount $

Book Income: $795,000

(+/-)Adjustment of Depreciation ($595,000)

(-) Exempt Income $311,000

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Total Taxable Income/(Loss) ($111,000)

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Company's Current Year Income tax Expense/Benefit

Tax Expense i.e. Taxable income*Prevailing Tax Rate

Tax Benefit = Saving in Tax

Current Year's Income result in a loss of $111,000 which can be adjusted in next year's taxable income. So this results in current year tax liability as nil, saving all the tax on book income $795,000.

Tax Benefit = tax on book income - tax on adjusted taxable income

= Tax Rate* $795,000 - Nil (because of Loss)