Grand Corporation reported pretax book income of $$672,000.$ Tax depreciation exceeded book depreciation by $$448,000.$ In addition, the company received $$336,000$ of tax$-$exempt municipal bond interest. The company's prior$-$year tax return showed taxable income of $$56,000.$ Grand's beginning book $($tax$)$ basis in its fixed assets was $$2,120,000($$$1,896,000)$ and its ending book $($tax$)$ basis is $$2,620,000($$$1,972,000).$ Compute the company's current income tax expense or benefit.

ControlExplanation

Pretax book income $ $672,000$

Tax$-$exempt interest income $(336,000)$

Excess tax depreciation $(448,000)$

Net operating loss $ $(112,000)$

Current income tax expense $$0$

Grand will record a current tax expense of $$0$ for the year. The NOL can only be carried forward to offset income in a future year, so the current tax expense is not affected by any carryback. To determine the deferred income tax expense or benefit, Grand must determine the change in the difference between the book and tax bases of assets and liabilities. At the beginning of the year, the taxable temporary difference in the book and tax basis in fixed assets was $$224,000($$$2,120,000$ $$1,896,000).$ At the end of the year, the taxable temporary difference is $$648,000($$$2,620,000$ $$1,972,000)$ resulting in a change of $$424,000.$ The current year NOL creates a deductible temporary difference of $$112,000.$ Grand will have a deferred tax expense of $$65,520$ determined as follows:

Increase in taxable temporary difference $$(424,000)$

Increase in deductible temporary difference $112,000$

Increase in net taxable temporary difference $$(312,000)$

Tax rate $21\%$

Deferred tax expense $$65,520$

The increase in net taxable temporary difference for the year produces a deferred tax expense $($and not a benefit$)$ because it increases the company's future tax obligation.