Question

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow's income tax liability for the year?

a. $45,650
b. $62,400
c. $33,600
d. $32,700
e. None of these choices are correct.

Answer 1

Sparrow Corporation's income tax liability is calculated by subtracting operating expenses from operating income, adjusting for the net capital gain, and then applying the flat tax rate of 34% on the resulting taxable income. The correct tax liability is $54,400.

Step-by-step explanation:

To calculate Sparrow Corporation's income tax liability for the year, we first calculate the taxable income, which is operating income minus operating expenses plus the net capital gain. The net capital gain is the long-term capital gain minus the short-term capital loss. Therefore, the taxable income is calculated as $425,000 (operating income) - $280,000 (operating expenses) + ($25,000 (long-term capital gain) - $10,000 (short-term capital loss)) = $160,000.

According to the provided corporate income tax rate structure, Sparrow Corporation's taxable income of $160,000 falls under the flat tax rate of 34%. Thus, the income tax liability is 34% of $160,000, which amounts to $54,400.