[MWest33330q4CPA]

This questions showed up on the practice exam in Becker:

For the current year, Hammond Corporation reported book income of $2,300,000. Included in that amount was corporate bond interest income of $100,000, municipal bond interest income of $200,000, $80,000 for meals and entertainment expense, $75,000 of rental expense, and $20,000 for life insurance premiums on an officer’s life (corporation is the beneficiary). In Hammond’s Schedule M-1 of Form 1120 for the current year, which reconciles book income to taxable income, what amount should be reported as taxable income?

Would anyone know why the $75,000 rental expense would not be added back to the $2.3 million. Isn’t that considered passive activity and not deductible unless you have passive activity income. Becker offers no explanation. Thanks

[Anonymous]

Rent expense in this case is an operating expense. It's part of the business (e.g. renting out warehouses as a manufacturer).

You're assuming that this company is something like a real estate company, leasing out warehouses to other companies, and that rent expense is the expense that real estate company incurs. That's a really big assumption that completely changes the problem (the book income would then probably be passive income as well).

Takeaway: “rent expense” probably means what I said in the first two sentences. So unless you're told otherwise, just assume it's active.

[PurpleK]

@Akvod: If you were a real estate company and leasing out warehouses, you would probably be generating rental real estate income as opposed to expenses.

@MWest: Passive activity rules do not apply to corporations. Only to individuals. Thus rental expense is deductible for book and tax.

[Anonymous]

PurpleK what about SG&A?

[MWest33330q4CPA]

Of course to both of you. My mind was so focused on one thing. Thank you for the explanation.

[Author]

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