Chapter 16: Taxation of Individuals and Business Entities

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Question:

Timpanogos Inc. is an accrual-method calendar-year corporation. For 2012, it reported financial statement income after taxes of $1,149,000. Timpanogos provided the following information relating to its 2012 activities:
Life insurance proceeds as a result of CEO’s death
$200,000
Revenue from sales (for book and tax purposes)
2,000,000
Premiums paid on the key-person life insurance policies. The policies have no cash surrender value.
21,000
Charitable contributions
180,000
Overhead costs that were expensed for book purposes but are included in ending inventory for tax purposes under § 263A.
50,000
Overhead costs that were expensed for book purposes in 2011 but were included in 2011 ending inventory for tax purposes under §263A. All 2011 ending inventory was sold in 2012.
60,000
Cost of goods sold for book purposes
300,000
Interest income on private activity tax-exempt bonds issued in 2004
40,000
Interest paid on loan obtained to purchase tax-exempt bonds
45,000
Rental income payments received and earned in 2012
15,000
Rental income payments received in 2011 but earned in 2012
10,000
Rental income payments received in 2012 but not earned by year end
30,000
MACRS depreciation
55,000
Book Depreciation
25,000
Alternative minimum tax depreciation
50,000
Net capital loss
45,000
Federal income tax expense for books in 2012
500,000
Timpanogos did not qualify for the domestic production activities deduction.
Required:
a. Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income and identify all of the adjustments necessary to arrive at taxable income.
b. Identify each book-tax difference as either permanent or temporary.
c. Complete Schedule M-1 for Timpanogos.
d. Compute Timpanogos, Inc.’s regular tax liability for 2012.
e. Determine Timpanogos’s alternative minimum tax, if any.

Step 1 of 4 a&b. Timpanogos’s taxable income is $1,512,000, computed as follows:

Description
Book
Income
(Dr) Cr
Book-tax adjustments*
Taxable

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