Question

Luong Corporation, a calendar year, accrual basis corporation, reported $1.15 million of net income after tax on its financial statements prepared in accordance with GAAP. The corporation’s books and records reveal the following information:

Luong's federal income tax expense per books was $203,000.
Luong's book income included $13,000 of dividends received from a domestic corporation in which Luong owns a 25 percent stock interest, and $5,500 of dividends from a domestic corporation in which Luong owns a 5 percent stock interest.
Luong recognized $13,000 of capital losses this year and no capital gains.
Luong recorded $9,600 of book expense for meals not provided by a restaurant and $11,500 of book expense for entertainment costs.
Luong's depreciation expense for book purposes totaled $403,000. MACRS depreciation was $475,000.
Required:
Compute Luong's federal taxable income and regular tax liability.
Prepare a Schedule M-1, page 6, Form 1120, reconciling Luong’s book and taxable income.

Answer 1

Explanation:

To compute Luong Corporation's federal taxable income and regular tax liability, we need to reconcile Luong's book income with its taxable income by preparing a Schedule M-1, page 6, Form 1120. Let's go through the reconciliation process step by step:

Start with net income per books: $1,150,000

Add back book expenses that are not deductible for tax purposes:

Meal expenses not provided by a restaurant: $9,600

Entertainment costs: $11,500

Total adjustments: $21,100

Net income before book-to-tax adjustments: $1,150,000 + $21,100 = $1,171,100

Deduct tax-exempt income (dividends received):

Dividends received from a 25% stock interest: $13,000

Dividends received from a 5% stock interest: $5,500

Total adjustments: $18,500

Taxable income before book-to-tax adjustments: $1,171,100 - $18,500 = $1,152,600

Add non-deductible expenses for tax purposes:

Capital losses: $13,000

Total adjustments: $13,000

Taxable income after book-to-tax adjustments: $1,152,600 + $13,000 = $1,165,600

Determine depreciation difference:

Book depreciation: $403,000

MACRS depreciation: $475,000

Depreciation difference: $475,000 - $403,000 = $72,000

Taxable income after depreciation adjustment: $1,165,600 - $72,000 = $1,093,600

Calculate federal taxable income:

Federal taxable income: $1,093,600

Compute the regular tax liability using the applicable tax rates for the corporation's taxable income.

Please note that the specific tax rates and calculations may vary depending on the tax year and any changes in tax laws or regulations. It is recommended to consult with a tax professional or reference the appropriate tax forms and instructions for accurate calculations based on the current tax laws and regulations.