MODULE 36 TAXES: CORPORATE
complete destruction of its machine. If business property is
completely destroyed, the amount of casualty loss deduction
is the property's adjusted basis immediately before the casu-
alty. Note that the "$100 floor" and "10% of adjusted gross
income" limitations that apply to personal casualty losses,
do not apply to business casualty losses.
C.4.I. R&D Expenditures
58. (a) The requirement is to determine the proper treat-
ment for qualifying research and experimentation expendi-
tures. A taxpayer can elect to deduct qualifying research
and experimentation expenditures as a current expense if the
taxpayer so elects for the first taxable year in which the ex-
penditures are incurred. Otherwise, the taxpayer must capi-
talize the expenditures. Then, if the capitalized costs are not
subject to depreciation (because there is no determinable
life), the taxpayer can amortize them over a period of sixty
months or longer.
C.6. Reconcile Book and Taxable Income
59. (c) The requirement is to determine Kelly Corp.'s
taxable income given net income per books of $300,000,
that included $50,000 of dividend income and an $80,000
deduction for bad debt expense. Since the dividends were
received from a 5%-owned taxable domestic corporation,
they are eligible for a 70% dividends received deduction
($50,000 x 70% = $35,000). Since no bad debts were actu-
ally written off and the reserve method cannot be used for
tax purposes, the $80,000 of bad debt expense per books is
not deductible for tax purposes and must be added back to
book income to arrive at taxable income. Kelly's taxable'
income is $300,000 - $35,000 + $80,000 = $345,000.
60. (c) The requirement is to determine Maple Corp.'s
taxable income given book income before federal income
taxes of $100,000. The provision for state income taxes of
$1,000 that was deducted per books is also an allowable
deduction in computing taxable income. The interest earned
on US Treasury Bonds of $6,000 that was included in book
income must also be included in computing taxable income.
The $2,000 of interest expense on the ba~.Joan~chase
the US Treasury Bonds was deduc~per books and is also
an allowable deduction in computing taxable income, be-
cause the interest incom;JrOm the obligations is taxable.
Since there are no differences between the book and tax
treatment of these items, taxable income is the same as book
income before federal income taxes, $100,000.
61. (d) The requirement is to determine Dodd Corp.' s
taxable income given net income per books of $100,000.
The $27,000 provision for federal income tax deducted per
books is not deductible in computing taxable income. The
$5,000 net capital loss deducted per books is not deductible
in computing taxable income because a corporation can only
use capital losses to offset capital gains. The life insurance
premiums of $3,000 deducted per books are not deductible
in computing taxable income because life insurance pro-
ceeds are excluded from gross income. Thus, Dodd Corp.' s
taxable income is $100,000 + $27,000 + $5,000 + $3,000 =
$135,000.
62. (c) The requirement is to determine Bard Corp.'s
taxable income given book income of $450,000. No ad-
justment is necessary for the $4,000 of state corporate in-
come tax refunds since they were included in book income
623
and would also be included in taxable income due to the "tax
benefit rule" (i.e., an item of deduction that reduces a tax-
payer's income tax for a prior year must be included in gross
income if later recovered). The life insurance proceeds of
$15,000 must be subtracted from book income because they
were included in book income, but would be excluded from
taxable income. The net capital loss of $20,000 that was
subtracted in computing book income must be added back to
book income because a net capital loss is not deductible in
computing taxable income. Thus, Bard Corp.' s taxable in-
come would be $450,000 - $15,000 + $20,000 = $455,000.
63. Cc) The requirementis to determine Dewey
Corporation's taxable income, given that organization costs
of $257,400 were deducted as an expense in arriving at book
income of $520,000. For organizatinal expenditures in-
curred or paid after October 22, 2004, a corporation may
elect to deduct up to $5,000 for the tax year in which the
corporation begins business. The $5,000 amount must be
reduced by the amount by which organizational expenditures
exceed $50,000. Remaining expenditures are deducted rata-
bly over the 180-month period beginning with the month in
which the corporation begins business. Since Dewey began
business in June, the allowable amortization for 2009 would
be $257,40Q x 7/180 = $10,010. Thus, adding back the
$257,400 deduction for organization expense to book in-
come, and subtracting the $10,010 of allowable amortization
for tax purposes results in taxable income of $520,000 +
$257,400 - $10,010 = $767,390.
64. (c) The requirement is to determine net income per
books given TI of $700,000.
Taxable income $700,000
Provision for federal income tax -280,000
Depreciation on tax return + 130,000
Depreciation per books
Life insurance proceeds
Net income per books . - 75,000
+ LOO.OOO
sszs.coo
The provision for federal income tax is not deductible in
computing TI but must be deducted per books. The life
insurance proceeds are tax exempt, but must be included per
books.
65. (d) The requirement is to compute Ajax's taxable
income given book income of $1,200,000 and items in-
cluded in the computation of book income. Book income
must be adjusted for the tax-exempt interest (net of related
expenses) and the provision for federal income tax: .
Book income $1,200,000
Municipal bond interest (40,000)
Nondeductible interest expense (to produce
tax-exempt interest income) 8,000
Provision for federal income tax 524,000
Taxable income $1692 000
The damages received for patent infringement that were
included in book income are similarly included in taxable
income, so no adjustment is necessary.
C.6.c. Schedule M-I
66. (d) The requirement is to determine the amount of
income to be shown on the last line of Farve Corp.'s Sched-
ule M-I for 2009. Schedule M-I provides a reconciliation
of income reported per books with income reported on the
tax return. Generally, items of income and deduction whose
book and tax treatment differ, result in Schedule M-I items.
However, since Schedule M-I reconciles to taxable income