C Corporation Tax Return Assignment

SMITH Corporation is a calendar-year corporation that began business on January 1, 2014. For 2014, it reported the following information in its current year audited income statement. Notes with important tax information are provided below.

Required:

Identify the book-to-tax adjustments for SMITH.

a) Reconcile book income to taxable income and identify each booktax difference as temporary or permanent.

b) Compute SMITH's regular income tax liability.

c) Complete SMITH's Schedule M-1, page 5 of Form 1120

d) Complete SMITH's Form 1120, page 1 (use 2013 form if 2014 form is unavailable). Ignore estimated tax penalties when completing this form.

SMITH Corp. Income Stmt for Current Year	Book Income
Revenue from sales	$40,000,000
Cost of goods sold	(27,000,000)
Gross profit	$13,000,000
Other income:
Income from investment in corporate stock	300,0001
Interest income	20,0002
Capital gains (losses)	(4,000)
Gain or loss from disposition of fixed assets	3,0003
Miscellaneous income	50,000
Gross Income	$13,369,000
Expenses:
Compensation	(7,500,000)4
Stock option compensation	(200,000)5
Advertising	(1,350,000)
Repairs and maintenance	(75,000)
Rent	(22,000)
Bad debt expense	(41,000)6
Depreciation	(1,400,000)7
Warranty expenses	(70,000)8
Charitable donations	(500,000)9
Meals and entertainment	(18,000)
Goodwill impairment	(30,000)10
Organizational expenditures	(44,000)11
Other expenses	(140,000)12
Total expenses	($11,390,000)
Income before taxes	$ 1,979,000
Provision for income taxes	(720,000)13
Net Income after taxes	$ 1,259,00014

NOTES:

1. SMITH owns 30 percent of the outstanding Hobble Corp. (HC) stock. Hobble Corp. reported $1,000,000 of income for the year. SMITH accounted for its investment in HC under the equity method and it recorded its pro rata share of HC's earnings for the year. HC also distributed a $200,000 dividend to SMITH.

2. Of the $20,000 interest income, $5,000 was from a City of Seattle bond (issued in 2013) that was used to fund public activities, $7,000 was from a Tacoma City bond (issued in 2012) used to fund private activities, $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account.

3. This gain is from equipment that SMITH purchased in February and sold in December (i.e., it does not qualify as 1231 gain).

4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).

5. This amount is the portion of incentive stock option compensation that vested during the year (recipients are officers).

6. SMITH actually wrote off $27,000 of its accounts receivable as uncollectible.

7. Regular tax depreciation was $1,900,000 and AMT (and ACE) depreciation was $1,700,000.

8. In the current year, SMITH did not make any actual payments on warranties it provided to customers.

9. SMITH made $500,000 of cash contributions to qualified charities during the year.

10. On July 1 of this year SMITH acquired the assets of another business. In the process it acquired $300,000 of goodwill. At the end of the year, SMITH wrote off $30,000 of the goodwill as impaired.

11. SMITH expensed all of its organizational expenditures for book purposes. It expensed the maximum amount of organizational expenditures allowed for tax purposes.

12. The other expenses do not contain any items with booktax differences.

13. This is an estimated tax provision (federal tax expense) for the year. (In a subsequent class period, we will learn how to compute the correct tax provision.) Assume that SMITH is not subject to state income taxes.

14. SMITH calculated that its domestic production activities deduction (DPAD) is $90,000. This amount is not included on the audited income statement numbers.