XYZ Corporation, a Chapter C corporation, had a correct tax amount of $1,000,000 but reported only $800,000. There is no claim of fraud. Is this a substantial understatement that will subject XYZ to the 20% understatement penalty?
Understatement is a situation where the amount of tax which is correct is different from the amount actually reported in the Tax Return. An understatement may involve penalty if the amount involved is substantial.
Substantial Understatement, in case of Corporations, is considered when the amount of understatement is greater than 10% of the correct amount of tax or $10,000.
The penalty involved shall be 20% of the amount not reported i.e. understated.
However, penalty on understatement is applicable only in cases where the reporting is done on account of negligence or failure to keep adequate records. If proper explanation for the understatement is provided, no penalty shall be levied.
In the given case, XYZ Corporation is a Chapter C Corporation. The actual amount of Tax which should have been reported was $1,000,000 where as it only reported $800,000. So, there is an understatement of $200,000.
Based on the clause mentioned above, since the amount of understatement is more than 10% of the actual amount of tax to be reported ($200,000 > 1,000,000*10% = $100,000), penalty of 20% shall be applicable if such amount was intentionally understated. However, if they prove the reasons for the understatement, the penalty will be waived off.
XYZ Corporation, a Chapter C corporation, had a correct tax amount of $1,000,000 but reported only...
Henry's correct tax amount is $500,000, but he filed a form reporting that it was only $400,000. There is no claim of fraud. Is this a substantial understatement that will subject him to the 20% understatement penalty?
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...
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...
Jack is the only shareholder of XYZ Corporation. At year-end, XYZ had $200 of current year earnings and profits and $600 of accumulated earnings and profits. If XYZ distributes cash of $200 to Jack, what is Jack’s tax liability on the dividend, if any? Assume Jack has a basis of $10 in XYZ shares. How does this result change if XYZ only has $50 of current earnings and profits and $100 of accumulated earnings and profits?
The following information applies to the questions displayed below.] 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...
[The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use 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...
[The following information applies to the questions displayed below.] 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...
C: 15-64 Chapter 15 Tax Strategy Problem The IRS is disputing a deduction reported on your Year 1 tax return, which you filed on April 12 of Year 2. On April 4 of Year 5, the IRS audit agent asks you to waive the statute of limitations for the entire return so as to give her additional time to obtain a Technical Advice Memorandum. The agent proposes in return for the waiver a “carrot”—the prospect of an offer in compromise—and...
XYZ is a calendar-year corporation that began business on January 1, 2020. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp.BookIncomeIncome statementFor current yearRevenue from sales$40,000,000Cost of Goods Sold(27,000,000)Gross profit$13,000,000Other income:Income from investment in corporate stock300,0001Interest income20,0002Capital gains (losses)(4,000)Gain or loss from disposition of fixed assets3,0003Miscellaneous income50,000Gross Income$13,369,000Expenses:Compensation(7,500,000)4Stock option compensation(200,000)5Advertising(1,350,000)Repairs and Maintenance(75,000)Rent(22,000)Bad Debt expense(41,000)6Depreciation(1,400,000)7Warranty expenses(70,000)8Charitable donations(500,000)9Meals(18,000)Goodwill impairment(30,000)10Organizational expenditures(44,000)11Other expenses(140,000)12Total expenses$(11,390,000)Income before taxes$1,979,000Provision for income...
Marathon Inc. (a C corporation) reported $1,000,000 of taxable income in the current year. During the year, it distributed $100,000 as dividends to its shareholders as follows: (New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change. Leave no answer blank. Enter zero if applicable.) $5,000 to Guy, a 5 percent individual shareholder. $15,000 to Little Rock Corp., a 15 percent shareholder (C corporation). $80,000 to other shareholders. How much of...