XYZ is a calendar-year corporation that began business on January 1, 2016. For 2016, 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 XYZ.

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

Compute XYZs regular income tax liability.

Complete XYZs Schedule M-1.

Complete XYZs Form 1120, page 1 (use the 2015 form if the 2016 form is unavailable). Ignore estimated tax penalties when completing this form.

Compute XYZs alternative minimum tax, if any.

Complete Form 4626 for XYZ (use the 2015 form if the 2016 form is unavailable).

Determine the quarters for which XYZ is subject to underpayment of estimated taxes penalties (see estimated tax information below).

XYZ Corp. Income Statement for Current Year	Book Income	Book to Tax Adjustments (Dr.) Cr.	Taxable 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

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Notes

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

Of the $20,000 interest income, $5,000 was from a City of Seattle bond (issued in 2014) that was used to fund public activities, $7,000 was from a Tacoma City bond (issued in 2014) 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.

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

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

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

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

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

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

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

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

XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes.

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

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 XYZ is not subject to state income taxes.

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

Estimated Tax Information

XYZ made four equal estimated tax payments totaling $480,000. Assume for purposes of estimated tax liabilities, XYZ was in existence in 2015 and it reported a tax liability of $800,000. During 2016, XYZ determined its taxable income at the end of each of the four quarters as follows:

Quarter-End	Cumulative Taxable Income (Loss)
First	$ 350,000
Second	800,000
Third	1,000,000

Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations.