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XYZ is a calendar-year corporation that began business on January 1, 2012. For 2012, it reported the following information in its current year audited income statement. Notes with important tax information are provided below.
XYZ corp.
Income statement
Book For current year Income
Revenue from sales $40,000,000
Cost of Goods Sold (27,000,000)
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Gross profit $13,000,000
Other income:
Income from investment in corporate stock 300,000 (Note 1)
Interest income 20,000 (Note 2)
Capital gains (losses) (4,000)
Gain or loss from disposition of fixed assets 3,000 (Note 3)
Miscellaneous income 50,000
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Gross Income $13,369,000
Expenses:
Compensation (7,500,000) (Note 4)
Stock option compensation (200,000) (Note 5)
Advertising (1,350,000)
Repairs and Maintenance (75,000)
Rent (22,000)
Bad Debt expense (41,000) (Note 6)
Depreciation (1,400,000) (Note 7)
Warranty expenses (70,000) (Note 8)
Charitable donations (500,000) (Note 9)
Meals and entertainment (18,000)
Goodwill impairment (30,000) (Note 10)
Organizational expenditures (44,000) (Note 11)
Other expenses (140,000) (Note 12)
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Total expenses $(11,390,000)
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Income before taxes $1,979,000
Provision for income taxes (720,000) (Note 13)
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Net Income after taxes $1,259,000 (Note 14)
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1. XYZ owns 30 percent of the outstanding Hobble Corp. (HC) stock. Hobble Corp. reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method and it recorded its pro rata share of HC’s earnings for the year. HC also distributed a $200,000 dividend to XYZ.
2. Of the $20,000 interest income, $5,000 was from a City of Seattle bond (issued in 2007) that was used to fund public activities, $7,000 was from a Tacoma City bond (issued in 2008) used to fund private activities, $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account.
3. This gain is from equipment that XYZ purchased in February and sold in December (that is, it does not qualify as §1231 gain).
4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).
5. This amount is the portion of incentive stock option compensation that vested during the year (recipients are officers).
6. XYZ actually wrote off $27,000 of its accounts receivable as uncollectible.
7. Regular tax depreciation was $1,900,000 and AMT (and ACE) depreciation was $1,700,000.
8. In the current year, XYZ did not make any actual payments on warranties it provided to customers.
9. XYZ made $500,000 of cash contributions to qualified charities during the year.
10. On July 1 of this year XYZ acquired the assets of another business. In the process it acquired $300,000 of goodwill. At the end of the year, XYZ wrote off $30,000 of the goodwill as impaired.
11. XYZ expensed all of its organizational expenditures for book purposes. It expensed the maximum amount of organizational expenditures allowed for tax purposes.
12. The other expenses do not contain any items with book-tax differences.
13. This is an estimated tax provision (federal tax expense) for the year. (In a subsequent class period, we will learn how to compute the correct tax provision.) Assume that XYZ is not subject to state income taxes.
14. XYZ calculated that its domestic production activities deduction (DPAD) is $90,000. This amount is not included on the audited income statement numbers.
Estimated tax information:
XYZ made four equal estimated tax payments totaling $480,000. Assume for purposes of estimated tax liabilities, XYZ was in existence in 2011 and it reported a tax liability of $800,000. During 2012, XYZ determined its taxable income at the end of each of the four quarters as follows:
Quarter-end Cumulative taxable income (loss)
First $350,000
Second $800,000
Third $1,000,000
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Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations (Round your answers to the nearest dollar amount. Omit the “$” sign in your response.)
a. Compute XYZ’s taxable income.
b. Compute XYZ’s regular income tax liability.
This problem uses 2012 Tax Rules
Please include a step-by-step explanation of how to arrive at the correct answers