I have a question about Reg simulation #36:
Tulinsky Corp., is a calendar-year accrual-basis corporation that commenced operations on November 1, Year 4. The following adjusted accounts appear on Tulinsky's records for the year ended December 31, Year 5. Tulinsky is not subject to the uniform capitalization rules.
COSTS AND EXPENSES
Cost of goods sold $4,350,000
Salaries and wages 1,220,000
Depreciation:
Real property 50,000
Personal property 100,000
Bad debt (1) 20,000
State franchise tax 25,000
Vacation expense 10,000
Interest expense (2) 16,000
Employee health insurance coverage 19,000
Organizational costs (3) 50,000
Donated property (4)
Federal income taxes 200,000
Other expenses (5) 29,000
(1) Bad Debt: Represents the increase in the allowance for doubtful accounts based on an aging of accounts receivable. Actual bad debts written off were $8,000.
(2) Interest expenses on:
Mortgage loan: $12,000
Loan obtained to purchase municipal bonds: $1,000
Line of credit loan: $3,000
(3) Organizational costs of $50,000 were spent in Year 4. Tulinsky made the election to deduct these costs.
(4) Tulinsky donated a parcel of unimproved land to a qualified charity. The property was acquired in Year 1 at a cost of $15,000 and at the time of the donation had an FMV of $250,000.
(5) Start-up costs of $60,000 were spent in Year 4. Tulinsky began operation on November 1, Year 4. The company made the election to deduct the start-up costs.
An abbreviated deduction section for Form 1120 is provided below for the Tulinsky Corporation. The total income for Tulinsky Corporation is $2,600,000. Fill in the appropriate dollar amounts (i.e., no cents are recorded) for each of the shaded cells appearing in the form. If the value of a cell is zero, you must enter a zero (“0”) to receive credit for your answer.
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My question is, the solution calculates the charitable contribution without considering the cost of good sold because COGS wasn't included in the partial 1120 form. It doesn't seem correct to me.
In reality the charitable contribution should be calculated using ATI, so if sale minus COGS is a negative number, aka we are in a NOL position, we won't be able to make any charitable contribution. Is that correct?
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