Question

During the current year, Jay Corporation, a calendar year personal service C corporation, had operating income of income of 300,000, operating expenses of 200,000, a short-term capital gain of 5,000, and a long-term capital loss of 35,000. How much is Jay's income tax liability for the year?

1) 21,000
2) 22,250
3) 35,000
4) 14,700
5) None of these choices are correct.

Answer 1

Jay Corporation's income tax liability for the year is calculated by determining the taxable income and applying the current corporate tax rate. The taxable income is $100,000 and with the tax rate at a flat 21%, the tax liability is 1) $21,000.

Step-by-step explanation:

Calculation of Jay Corporation's Income Tax Liability

To calculate Jay Corporation's income tax liability for the current year, we follow these steps:

1. Start with the operating income, which is $300,000.
2. Subtract the operating expenses of $200,000, resulting in a gross profit of $100,000.
3. Add the short-term capital gain of $5,000.
4. Subtract the long-term capital loss of $35,000. Since a C corporation can use capital losses to offset capital gains but not ordinary income, the $5,000 gain is negated, and there is a net capital loss of $30,000. However, the remaining loss cannot be deduced from the ordinary income, hence it will not affect the taxable income in this year.
5. After applying capital gains and losses, the taxable income remains at $100,000.
6. According to the provided tax rate structure, the income tax rate for corporations is a flat 21% following the Tax Cuts and Jobs Act of 2017.
7. Therefore, Jay Corporation's income tax liability is 21% of $100,000, which equals $21,000.

Hence, the correct answer to how much Jay's income tax liability for the year is $21,000.