EFG, a calendar year, accrual basis corporation, reported $479,900 net income after tax on its financial statements prepared in accordance with GAAP. The corporation’s financial records reveal the following information:
• EFG earned $314,800 from a qualified domestic production activity.
• EFG earned $10,700 on an investment in tax-exempt municipal bonds.
• EFG’s allowance for bad debts as of January 1 was $21,000. Write-offs for the year totaled $4,400, while the addition to the allowance was $3,700. The allowance as of December 31 was $20,300.
• On August 7, EFG paid a $6,000 fine to a municipal government for a violation of a local zoning ordinance.
• EFG’s depreciation expense per books was $44,200, and its MACRS depreciation deduction was $31,000.
• This is EFG’s second taxable year. In its first taxable year, it recognized an $8,800 net capital loss. This year, it recognized a $31,000 Section 1231 gain on the sale of equipment. This was EFG’s only disposition of non-inventory assets.
• In its first taxable year, EFG capitalized $6,900 organizational costs for tax purposes and elected to amortize the costs over 180 months. For book purposes, it expensed the costs.
• EFG’s federal income tax expense per books was $241,589.
a. Compute EFG’s taxable income and regular tax.
b. Prepare a Schedule M-1, page 5, Form 1120, reconciling EFG’s book and taxable income.