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C Corporation Tax Return Assignment

Magalicious, Inc. is a corporation that began business on August 1, 2013 and operates on a fiscal year schedule ending July 31. For fiscal year 2016, it reported the following information in its current year audited income statement. Notes with important tax information are provided.

Megalicious, Inc.
Income Statement
For the year ended July 31,2016
Sales Revenue	$ 30,500,000.00
Sales returns and allowances	$ (45,000.00)
COGS	$(28,000,000.00)
Gross profit	$ 2,455,000.00
Income from investment in corporate stock	$ 300,000.00
Capital loss	$ (14,000.00)
Dividend Income	$ 5,000.00
Interest Income	$ 40,000.00
Miscellaneous Income	$ 40,000.00
Other Income	$ 371,000.00
Gross Income	$ 2,826,000.00
Expenses
Wages and Salaries	$ 1,400,000.00
Stock option compensation	$ 200,000.00
Depreciation	$ 500,000.00
Bad debt expense	$ 31,000.00
Meals and entertainment	$ 45,000.00
Maintenance	$ 65,000.00
Property taxes	$ 3,000.00
Warranty expenses	$ 30,000.00
Rent	$ 32,000.00
Advertising	$ 150,000.00
Organizational epenses	$ 20,000.00
Charitable contributions	$ 95,000.00
Supplies	$ 5,000.00
Other expenses	$ 150,000.00
Total expenses	$ 2,726,000.00
Income before taxes	$ 100,000.00
Income tax expense	$ (28,000.00)
Net income after taxes	$ 72,000.00

Required:

a. Reconcile book income to taxable income and identify each book-tax difference as temporary or permanent.

Magalicious, Inc.

Income Statement

For the year ended July 31, 2016

Notes:

Magalicious, Inc. owns 30% of the outstanding Mollie, Co. (MC) stock. Mollie, Co. reported $1,000,000 of income for the year. Magalicious, Inc. accounted for its investment in MC under the equity method and it recorded its pro rata share of MCs earnings for the year. MC also distributed a $400,000 dividend to Magalicious, Inc.

Magalicious sold Gizmo Inc. stock for $15,000. Their stock basis was $29,000.

Gizmo Inc. declared and paid a pro rata dividend to all stockholders of record before Magalicious Inc. sold their stock.

Of the $40,000 total interest income, $17,500 was from a city of Huntsville bond (issued in 2007) that was used to fund public activities, $10,000 was from city of Opelika bonds ($3,000 issued in 2008 and $7,000 issued in 2010) used to fund private activities, $10,500 was from corporate bonds ($6,000 from McDonalds Corp., $4,500 from Toyota Corp.), and the remaining $2,000 was from a money market account.

Miscellaneous Income does not have any book tax differences.

6. This includes total officer compensation of $750,000.

This amount is the portion of incentive stock option compensation that vested during the year (recipients are officers).

Regular tax depreciation was $600,000 and AMT depreciation was $475,000. ACE depreciation was $550,000.

Magalicious, Inc. actually wrote off $20,000 of its accounts receivable as uncollectible.

In the current year, Magaliscious, Inc. made $21,000 in actual payments on warranties it provided to customers.

Magaliscious, Inc. expensed all of its organizational expenditures for book purposes in the year of formation. It expensed the maximum amount of organizational expenditures allowed for tax purposes. The rules for both book and tax were the same as currently for organizational expenses in the year of formation.

Magaliscious, Inc. made $65,000 of cash contributions to 501(c)(3) charities and $25,000 to 501(c)(4) charities during the year. The company also made a contribution to The Wounded Warrior Project of $5,000. They did not receive any correspondence from this charity acknowledging their contribution or telling them the code section which applies.

The other expenses do not contain any items with book-tax differences.

This is an estimated tax provision for the year. The estimate includes $18,000 for federal income tax and $10,000 for state income tax.

On June 1 of this year, Magalicious, Inc. acquired the assets of another business. In the process, it acquired $300,000 of goodwill. Under ASU 2014-2, Magaliscious tested for impairment; at the end of the year, Magalicious, Inc. determined none of the goodwill was impaired.

Magalicious, Inc. calculated that its domestic production activities deduction (DPAD) is $8,000. This amount is not included on the audited income statement numbers.

Magalicious, Inc. did not perform well in its first year. Consequently, the company had a net operating loss of $10,000. As FY 2014 was its first year in existence, the company did not carry the NOL back. They carried the loss forward, utilizing $7,500 in FY 15. The remainder of the NOL carryforward is still available.

Estimated tax information:

Magalicious, Inc. made four equal, timely estimated tax payments totaling $18,000. For FY 2015, Magalicious, Inc. reported a tax liability of $0. During FY 2016, Magalicious, Inc. determined its taxable income at the end of each of the four quarters as follows:

Quarter-end	Cumulative taxable income (loss)
First	$25,000
Second	$50,000
Third	$75,000

Magalicious, Inc. is not considered a large corporation.