Question

Pls help with the numbers in red. Also, provide an explanation of your results! Thank you!

Compute HC Inc.'s current-year taxable income given the following information relating to its 2020 activities. Also, compute HC's Schedule M-1 assuming that HC's federal income tax expense for book purposes is $30,000. Use Exhibit 16-6. • Gross profit from inventory sales of $310,000 (no book-tax differences) Dividends HC received from 28 percent-owned corporation of $120,000 (this is also HC's pro rata share of the corporation's earnings) Expenses other than DRD, charitable contribution (CC), and net operating loss (NOL) are $300,000 (no book-tax differences). • NOL carryover from prior year of $12,000, • Cash charitable contribution of $50,000. Assume HC does not elect to use the 25% of modified taxable income limitation to determine its charitable contribution deduction

Answer 1

In case of Charitable Contribution

10% of taxable income Deduction is allowed. So 10% of $118,000 = $11,800

Now this $11,800 will come under the taxable income as deduction and remaining ($50,000 - $11,800) $38,200 will come under book tax adjustment under Dr.

So now Taxable Income before DRD is $118,000 - $11,800 = $106,200

Now In case of DRD

If the company receiving dividend owns less than 20% of the company paying dividend then it is entitled for 70% deductionof the dividend received.

If the company receiving dividend owns more than 20% but less than 80% of the companys paying dividend then it is entitled for 80% deduction.

If the company receiveing dividend owns more than 80% of the company paying dividend then it is entitled for 10% deduction of the dividend received.

In this case, HC owns 28% which lies under category 2 so he is entitled for 80% deduction of the dividend received i.e., 120,000 x 80% = $96,000

So this $96,000 will come under taxable income and the remaining (120,000 - 96,000) 24,000 book tax adjustment under (DR.).

So total taxable income will be $106,200 - $96,000 = $10,200.