Question

Do a Corporate Tax computation

You have been engaged by Nirvana, Inc., the happiest little corporation you know. They want you to tell them what their tax liability is. Please do a tax computation on the page provided. (Do not do a tax return.)

The following information applies to Nirvana, Inc. for their 2018 tax year:

Income:

              Revenue                                                                                                 $220,000

              Bank Interest                                                                                                 600

              Municipal Bond Interest                                                                            300

              Dividends (Nirvana’s ownership is 1%)                                          1,000

              Dividends (Nirvana’s ownership is 50%)                                       3,000

              Capital Losses                                                                                            (5,000)

              Rental Income                                                                                           16,000

Expenses

              Compensation of Officers                                                                     50,000

              Other Wages                                                                                              29,000

              Repairs                                                                                                              600

              Interest Expense – Corporate credit Cards                                         300

              Meals (100%)                                                                                               4,000

Telephone                                                                                                     3,200

              Advertising                                                                                                      700

              Depreciation – GAAP (MACRS is 6000)                                             8,000

              Professional Fees                                                                                          600

              Last Year’s State income tax                                                                  1,800

              Last Year’s Federal Income Tax                                                            1,000

Compute the corporate taxable income and the tax using the 2018 corporate income tax rates.

DO NOT PREPARE A FORMAL TAX RETURN. JUST DO A TAX CALCULATION ON THE NEXT PAGE!!!

Answer 1

The taxable income for corporation is arrived at by taking gross taxable income and deducting all allowable expenses.

The general rule is, all Income are taxable from whatsoever source derived, unless specifically excluded

All of ordinary and necessary expenses paid or incurred during the taxable year in carrying on business are deductible. Ordinary and necessary means that expenses are common in particular business or profession and they related to production of taxable income (unless different treatment provided in IRC)

A corporation taxable income is subject to flat tax of 21%

Nirvana, Inc.
Tax Computation for Year - 2018
	$ Amount
Net Income as per Books	136,700
Add Expenses as per books but not tax deductible
Add: Federal Income Tax as per books not deductible	1,000
Add: Depreciation as per books	8,000
Add: 50% Meal expense not deductible	2,000
Less Expenses tax deductible
Less: Depreciation as per MACRS	(6,000)
Less Income not taxable
Less: Municipal Bond Interest	(300)
Less: Dividends (Ownership is 1%) -DRD 50%	(500)
Less: Dividends (Ownership is 50%) - DRD 65 %	(1,950)
Add Losses not deductible
Add: Capital loss, (carried forward /carried back)	5,000
Net taxable Income	143,950
Tax Rate	21%
Tax Amount	30,230

Income:	$ Amount	Remarks
Revenue	220,000	Taxable on accrual basis
Bank Interest	600	Taxable on accrual basis
Municipal Bond Interest	300	Municipal bonds are commonly tax-free
Dividends (Nirvana’s ownership is 1%)	1,000	Dividend received deduction allowed 50%
Dividends (Nirvana’s ownership is 50%)	3,000	Dividend received deduction allowed 65%
Capital Losses	(5,000)	Capital losses can be offset against capital gains, Net Capital loss can be carried back 3 years and carried forwards 5 years
Rental Income	16,000	Taxable on accrual basis or advance received whichever earlier
Total	235,900
Expenses
Compensation of Officers	50,000	Deductible expense, executive compensation limit apply
Other Wages	29,000	Deductible expense,
Repairs	600	Deductible expense,
Interest Expense – Corporate credit Cards	300	Deductible expense, (30% Limitation apply)
Meals (100%)	4,000	50% tax Deductible expense,
Telephone	3,200	Deductible expense,
Advertising	700	Deductible expense,
Depreciation – GAAP (MACRS is 6000)	8,000	MACRS basis Deductible expense,
Professional Fees	600	Deductible expense,
Last Year’s State income tax	1,800	Deductible expense,
Last Year’s Federal Income Tax	1,000	Federal Income Tax not deductible
Total	99,200
Net Income	136,700