Question

C:3-38 Taxable Income Computation. Omega Corporation reports the following results for the current year: Gross profits on sales $120,000 Dividends from less-than-20%-owned domestic corporations 40,000 Operating expenses 100,000 Charitable contributions (cash) 11,000 a. What is Omega's charitable contributions deduction for the current year and its char! table contributions carryover to next year, if any? b. What is Omega's taxable income for the current year?

Answer 1

a)

computation Of Omega corporation Chartiable deduction and carry over

Particulars	Amount ($)	explanation
Gross Profit on sales	120000
Add dividend	20000	dividend received = 40000 allowable deduction = 50% dividend taxable = 20000*
Total Income	140000
Less Operating Expenses	- 100000	Allowed to deduct as business expense as per tax laws
Taxable Income before charitable deduction	40000
Less charitable deduction	-4000	40000*10%=4000 **
Net Taxable income	36000
federal tax liability @21%	7560	36000*21%

* As per dividend tax rules

if corporation received dividend from less than 20% owned domestic company it is allowable a deduction of 50%

so income which will be added in gross income will 40000*50%= $20000

deduction allowed 40000*50% = 20000

so 40000-20000= 20000

20000 will be added in gross income

** charitable contribution when provided in cash by corporation are allowed as deduction only uptio 10% of taxable income as federal business income tax rules

in this case 11000 of cash contribution is made by corporation

but taxable income before charitable deduction is 40000 and 10% of 40000= $4000

so upto $ 4000 is allowed as deduction and balance $ 7000 (11000-4000) will be carried forward

Answer of A part $ 4000 will allowed deduction and $ 7000 will be carried forward.

answer of part B

Particulars	Amount ($)	explanation
Gross Profit on sales	120000
Add dividend	20000	dividend received = 40000 allowable deduction = 50% dividend taxable = 20000*
Total Income	140000
Less Operating Expenses	- 100000	Allowed to deduct as business expense as per tax laws
Taxable Income before charitable deductio	40000
Less charitable deduction	-4000	40000*10%=4000 **
Net Taxable income	36000
federal tax liability @21%	7560	36000*21%

so taxable income of omega corporation= $ 36000