Question

Cramer Corporation, a calendar year, accrual basis corporation, reported $1.90 million of net income after tax on its 2020 financial statements prepared in accordance with GAAP. The corporation’s books and records reveal the following information:
 

• Cramer's federal income tax expense per books was $218,000.

• Cramer's book income included $28,000 of dividends received from a domestic corporation in which Cramer owns a 25 percent stock interest, and $13,000 of dividends from a domestic corporation in which Cramer owns a 5 percent stock interest.

• Cramer recognized $28,000 of capital losses this year and no capital gains.

• Cramer recorded $17,000 of book expense for meals and $19,000 of book expense for entertainment costs.

• Cramer's depreciation expense for book purposes totaled $418,000. MACRS depreciation was $475,000.
   

Required:

1. Compute Cramer's federal taxable income and regular tax liability.

2. Prepare a Schedule M-1, page 6, Form 1120, reconciling Cramer’s book and taxable income.

Answer 1

Answers:

Federal taxable income = $2,066,000

Tax liability = $413,200

Step-by-step explanation

Particular                                                                                  Amount

Net income after tax                                                               $1,900,000

Add: Federal income tax expense    $218,000

Less: Deduction of dividend income                                        $31,500

Add: 50% book expense                                                       $8,500

Add: Capital loss disallowed                                                   $28,000

Less: Excess dep on tax return (475,000-418,000) $57,000         

$2,066,000

Deduction of Dividend Income will be 80% on dividends from Domestic Corporation in which the corporation has 20% or more ownership and 70% on dividends from Domestic Corporation in which the corporation has less than 20% ownership. So it will be

80% of $28,000 + 70% of $13,000 = $22,400 + $9,100 = $31,500

As there is no capital gain, entire capital loss is disallowed on tax return.

The corporation federal taxable income is $2,066,000

Tax liability = Federal taxable income * Flat tax rate (may vary)

                          = $2,066,000 * 20%

                          = $413,200