[CPApracticer]

Azure, a C corporation, reports the following:

-Pretax book income of 543000

-Depreciation on tax return is 20000 greater than depreciation on FS

-Rent income reportable on the tax return is $36000 greater than rent income per the FS

-Fines for pollution appear as a 10000 expense in the FS

-Interest earned on municipal bonds is 25000

What is Azures taxable income?

a. 528000

b. 543000

c. 544000

d. 559000

Solution:

C is correct

Pretax book income 543000

Depreciation for tax purposes in excess of book rent income (20000)

Rent income for tax purposes in excess of book rent income 36000

Fines expensed for book purposes but not deductible for tax purposes 10000

Municipal bond interest not taxable for tax purposes (25000)

Ive always struggled doing these kinds of problems, the explanation is not very good. My exam is on friday. Can anyone explain a way for me to do these types of problems. I use to think if something is non taxable, then you subtract, and if it is non deductible, you add. Not sure if that works. Please helpp. Thank you 🙂

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[barelystayingsane]

Okay, so let's look at them one at a time. Tax depreciation is $20,000 higher than book depreciation. That means you can have a $20,000 higher expense for your taxable income. Increasing expenses decreases income. So you will subtract that from your book income.

Taxable rent income is $36,000 higher than book rent income. That means revenue is higher, which will increase income. So add that to your book income.

For tax purposes, fines are nondeductible, but you can deduct them on your financial statements. This means that this expense will not be allowed on your tax return. Since it is already included in book income, you must add it back.

Interest earned on muni bonds are tax-exempt, but they are included in your book income. This means you should subtract it from your book income to reach your taxable income. Since tax-exempt income is obviously not part of taxable income but is part of book income, your book income will be higher than your taxable income. Therefore, subtract from your book income to reach your taxable income.

Therefore, your answer is $543,000 – 20,000 + 36000 + 10,000 – 25,000 = $544,000.

Not trying to scare you, but it is very, very important that you understand how to do questions like this. I'd say the likelihood of seeing at least one question (probably more) on your exam is very high.

[icanhazcpa]

The easiest way for me to do this is to think about each item logically and how it would change the tax income. For example depreciation would be a deduction, and if the tax income had a larger deduction than book, you would subtract from the book because tax took an additional expense that the book didn't.

BEC - 83
FAR - 83
REG - 74, 78
AUD - 76

Becker Self Study

[icanhazcpa]

The easiest way for me to do this is to think about each item logically and how it would change the tax income. For example depreciation would be a deduction, and if the tax income had a larger deduction than book, you would subtract from the book because tax took an additional expense that the book didn't.

BEC - 83
FAR - 83
REG - 74, 78
AUD - 76

Becker Self Study

[Anonymous]

C is correct.

All u need to remember about conversion is:

1, thinking of the converson from book income to taxable income.

2, remove the items that have both impact on return and FS, FE, salary, dividend, etc.

3, add items that will increase the income on the return. Income only on the return is added back; expense not on the return is added back because less expense on the return, more income on the return. Example as advance rent for the last month lease (a liability on FS but an income on the return), federal income taxes, non deductible capital loss and etc.

4, minus items that will decrease the income on the return. Income only on FS; and expenses only on the return is a minus because more expense, less income. Example as tax-exempt income (interest), MARCS deduction over straight line method (financial accounting doesnt recognize MARCS method) and etc.

5, if it starts from TI to book income, reverse the procedures in 3&4.

U may still be confused, but u need to remember, conversion is to account the impact on both FS and return; if the impact is only on one side, you then pay attention to dig whether that impact will increase or decrease the impacted income (book or taxable).

Lets back on the question:

Pre tax book income 543.

Depreciation that only is on the return, it will decrease the taxable income, so it is a -20.

Rent that is only on the return, it will increase the taxable income, so it is a +36.

Fine that will not be on the return. When it is reduced from the return, deductible expense will be less and hence, more taxbale income. No doubt it is +10.

Tax exempt interest isnt an income on the return, when it is taken out, it will reduce the gross income and hence, the taxable income. Cleaerly it is a -25.

Now lets calculate: 543-20-25+36+10=544.

This question isnt super hard. Once you think you get it, tell me will the anwser change if there is a federal income tax of 15000? Think a bit, very tricky.

[Author]

Replies