Cranberry Corporation, a North Dakota company, is a producer of low-budget inde-pendent films. It engages in this activity both within the United States and in Canada. In the current year, it earned $200,000 of net income within the United States and $300,000 within Canada. Compensation paid to its U.S. workforce was $150,000, and total compensation paid to its Canadian workforce was $100,000. Total taxable income, before any domestic production activities deduction, was $450,000.
a. Cranberry is unsure whether film production is a qualifying activity for purposes of the domestic production activities deduction. If it is, calculate Cranberry’s allow-able deduction, its current year taxable income, and its regular income tax liability.
b. If film production does not qualify, calculate Cranberry’s regular income tax liability.
c. Compare your answers to a and b above to compute the potential tax savings for Cranberry attributable to the domestic production activities deduction. Comment on whether you feel this tax savings will influence the company to shift future production activities from Canada to the United States.