Permtemp Corporation formed in 2016 and, for that year, reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:

Additional information for 2016:

• The investment in corporate stock is comprised of less-than-20%-owned corporations. The dividends-received deduction percentage in 2016 and 2017 was 70% for less than 20%-owned property.

• Depreciation for tax purposes is $1.4 mill ion under MACRS.

• Bad debt expense for tax purposes is $150,000 under the direct write off method.

• Because of limitations, none of the charitable contributions will be deductible for tax purposes, and $22,500 of the meals and entertainment expenses will be disallowed for tax purposes.

• Ignore the U.S. production activities deduction. 

• The corporate tax rate in 2016 was 34%.

Required for 2016:

a. Prepare page 1 of the 2016 Form 1120, computing the corporation's NOL.

b. Determine the corporation's deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting under ASC 740. Use the balance sheet information to prepare Schedule L of the 2016 Form 1120.

c. Prepare the 2016 Schedule M-3 for Form 1120. 

d. Prepare a schedule that reconciles the corporation's effective tax rate to the statutory 34% tax rate.

For 2016 forms, go to forms and publications, prior year, at the IRS website, www.irs.gov.

For 2017, Permtemp reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:

Additional information for 2017:

• Because of limitations, $30,000 of the meals and entertainment expenses will be disallowed for tax purposes.

• Depreciation for tax purposes is $2.45 million under MACRS.

• Bad debt expense for tax purposes is $425,000 under the direct write-off method.

• Ignore the U.S. production activities deduction

• The corporate tax rate in 2017 was 34%.

• At the end of 2017, Congress reduced the corporate tax rate to 21% effective for 2018.

Required for 2017:

a. Prepare page 1 of the 2017 Form 1120, computing the corporation's taxable income and tax liability.

b. Determine the corporation's deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting ASC 740. Because of the enacted tax rate change, deferred assets and liabilities at the end of 2017 will need to be valued at 21%. Use the balance sheet information to prepare Schedule L of the 2017 Form 1120.

c. Prepare the 2017 Schedule M-3 for Form 1120.

d. Prepare a schedule that reconciles the corporation's effective tax rate to the statutory 34% tax rate. This schedule will need a line to reflect the change in the future tax rate.

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Sales Cost of goods sold Gross profit Dividend income Tax-exempt interest income $20,000,000 (15,000,000) $ 5,000,000 50,000 15,000 $ 5,065,000 Total income Expenses: Depreciation Bad debts $ 800,000 400,000 100,000 475,000 45,000 3,855,000 Charitable contributions Interest Meals and entertainment Other _(5,675,000) $ (610,000) $ 500,000 Total expenses Net loss before federal income taxes Cash Accounts receivable $ 2,000,000 (250,000) Allowance for doubtful accounts 1,750,000 4,000,000 Inventory Fixed assets $10,000,000 (800,000) Accumulated depreciation Investment in corporate stock Investment in tax-exempt bonds 9,200,000 1,000,000 50,000 $16,500,000 $ 2,610,000 8,500,000 6,000,000 (610,000) Total assets Accounts payable Long-term debt Common stock Retained earnings Total liabilities and equity $16,500,000