R3 M2 - Differences Between Book & Tax Flashcards
A corporation has book income of $50,000 in the current year, which includes the following:
State income taxes $3,000
Federal income taxes $12,000
What is the corporation’s taxable income for the current year?
A. $65,000 B. $50,000 C. $53,000 D. $62,000
Choice “D” is correct. The corporation’s book income of $50,000 includes expenses for both federal and state income tax. In determining its taxable income, the corporation must add back any expenses that reduce book income but that are not deductible for tax purposes. State income taxes are deductible for tax purposes, but federal income tax is not deductible for tax purposes. As such, the federal income tax amount must be added back to book income to reach taxable income. The $12,000 of federal income tax is added to the $50,000 of book income to reach $62,000 of taxable income.
Choice “A” is incorrect. In determining its taxable income, the corporation must add back those expenses that were used to reduce book income but that are not deductible for tax purposes. Federal income taxes are not deductible for tax purposes, but state income taxes are deductible for tax purposes. As such, the corporation will add back its federal income taxes, but not its state income taxes, in determining its taxable income. The corporation’s taxable income will be $62,000, equal to its $50,000 of book income plus the $12,000 of federal income tax.
Choice “B” is incorrect. The corporation’s taxable income is not $50,000. This would indicate that there are no differences between the corporation’s book income and taxable income. This is not correct because the $50,000 of book income includes an expense for federal income tax of $12,000, which is not deductible for tax purposes and must be added back to book income to reach taxable income.
Choice “C” is incorrect. In determining its taxable income, the corporation must add back any expenses that reduce book income but that are not deductible for tax purposes. The state income taxes reduce income and are deductible for tax purposes. As a result, the state income taxes are not added back to the corporation’s book income in order to determine taxable income.
