Question

M Corporation reported 2018 book net income of $185,000. The following items were included in book income for 2018:

State A income tax expense    $ 15,000

State B income tax expense    $ 5,000

Federal income tax expense   $49,000

Book depreciation expense     $ 18,000

Municipal bond interest income           $ 10,000

US government obligation interest income   $ 12,000

Dividends received from 5% owned US co.   $ 8,000

Separately, M Corporation computed federal tax depreciation of $26,000.

A)    Based on the above, compute M’s 2018 federal taxable income.

B)   M Corporation computed state tax depreciation of $23,000. M is only taxable in States A and B. All investment income, including interest and dividend income is earned in State A. State A allows exclusion for interest earned on federal obligations, taxes all municipal interest and disallows all deductions for state income taxes .State A has not adopted federal depreciation methods and does not recognize the dividends received deduction. State A apportions taxable income based on the average of three factors- payroll, property, and sales. M Corporation has 60% of its payroll, 40% of its property, and 20 % of its sales in State A. Based on the above information; compute M’s state 2018 taxable income in State A.

Answer 1

a. Computation of M's Federal Taxable Income

Particulars Amount ($)

Net Income for 2018 = 185,000

(+) State A Income Tax Expense = 15,000

(+) State B Income Tax Expense = 5000

(+) Federal Income Tax Expense = 49,000

(+) Book Depreciation = 18,000

(-) Federal Tax Depreciation = (26,000)

Federal Taxable Income = 246,000

b. M's State Taxable Income In State A

Particulars Amount($)

Net Income for 2018 = 185,000

(+) State A Income Tax Expense = 15,000

(+) Book Depreciation = 18,000

(-) State Tax Depreciation = (23,000)

(+) Municipal Bond Interest Income = 10,000

(+) US Govt Obligation Interest Income = 12,000

(+) Dividend Received from 5% owned US Co. = 8,000

M's State Taxable Income In State A = 225,000