TAX Preparation Problem

Transformers Corporation (a C-Corporation) is located in Detroit, Michigan manufactures mechanized robotics.

Prepare a Schedule M-1 reconciling net income per books to taxable income for the year ended December 31, 2016.

Facts:

• After-tax net income per books equaled $290,000 for the year ended December 31, 2016.
• The Company reported $137,700 in Federal income tax expense and $27,400 in State of Michigan corporate income tax expense for the year ended December 31, 2016.
• Included in net income per books for the year ended December 31, 2016 is $5,000 of tax-exempt interest income earned on investments in municipal bonds.
• The Company uses straight-line depreciation in computing net income per books, accordingly the company claimed $56,200 in depreciation expense for the year ended December 31, 2016; depreciation expense recomputed under MACRS is $87,300 for the same period.
• The Company maintains a life insurance policy on an officer of the Corporation where the Company is the beneficiary. The insurance premium paid and expensed for year ended December 31, 2016 equaled $2,000.
• During 2016, the Company made charitable contributions totaling $50,000 and deducted in computing net income per books.
• Net short term capital loss for the year ended December 31, 2016 equaled $20,000.
• Non-deductible portion of meals and entertainment was $11,400 for the year ended December 31, 2016.
• The Company paid dividends of $25,000 to Shareholders during 2016.
• 2016 Qualified Production Activities Income was $300,000; assume no W-2 wage limitation on the DPAD.

Extra Credit:

Compute the 2016 Federal income tax liability using IRC Sec. 11. Assume no estimates were paid during the year and no overpayment carried forward from 2015. Do not compute interest/penalty for failure to make estimated payments during the year. The Corporation is NOT a Personal Service Corporation.