Question

In the current year, Tanager Corporation (a C corporation) had operating

income of $480,000 and operating expenses of $390,000. In addition,
Tanager had a long-term capital gain of $55,000 and a short-term capital loss of
$40,000.

a. Compute Tanager's taxable income and tax for the year.

b. Assume, instead, that Tanager's long-term capital gain was $15,000 (not $55,000).
Compute Tanager's taxable income and tax for the year.

Answer 1

a. Tanager Corporation's taxable income for the year is $105,000, and the tax liability amounts to $22,250.

b. If Tanager's long-term capital gain was $15,000 instead of $55,000, the taxable income for the year would be $60,000, resulting in a tax liability of $11,750.

Step-by-step explanation:

For part a:

Tanager Corporation's taxable income calculation involves subtracting operating expenses from operating income and adjusting for capital gains and losses. Thus, ($480,000 - $390,000) + ($55,000 - $40,000) equals $105,000 in taxable income. Applying the corporate tax rate to this taxable income of $105,000 yields a tax liability of $22,250.

For part b:

If Tanager's long-term capital gain was $15,000 instead of $55,000, the taxable income calculation would change. The revised calculation would be ($480,000 - $390,000) + ($15,000 - $40,000), resulting in a taxable income of $60,000. Applying the corporate tax rate to this adjusted taxable income of $60,000 yields a reduced tax liability of $11,750.

In both scenarios, the taxable income is determined by subtracting operating expenses from operating income and adjusting for capital gains and losses. The change in the long-term capital gain significantly affects the taxable income and consequently alters the tax liability for Tanager Corporation.