Burcham corporation reported pretax book income of $752,500. tax depreciation exceeded book depreciation by $620,000. in addition, the company received $320,000 of tax-exempt municipal bond interest. the company’s prior-year tax return showed taxable income of $117,000. compute the company’s book equivalent of taxable income. use this number to compute the company’s total income tax provision or benefit.

a. Taxable income/loss = (-$187500)

b. Current income tax benefit = $39780

Explanation:

Lets first understand the difference between reported income and taxable income. Reported income is the income earned by an entity during an accounting period which is calculated based on accounting rules and conventions whereas taxable income is calculated by tax authorities based on their own policies.

Now an important thing here to note is 'accounting concepts differ from tax policies (i.e permanent differences), so due to the differences in the policies two income figures are calculated separately by the entities following accounting conventions and tax authorities.

For example accounting follows the accruals concept which requires entities to record expenses and revenue in the period they are incurred whereas tax authorities might be following a cash basis of accounting so they wouldn't be allowing any expenses that are non-cash, such as accounting depreciation which is replaced by tax depreciation.

Now coming to the calculation, taxable income is calculated by adding back non-cash items, deducting items that are tax-exempt and adding back items that are dis-allowable under tax authorities.

The taxable income is calculated as follows;

Pretax book income =         $752500

less: tax depreciation =      (-$620000)

less: tax-exempt income = (-$320000)

Taxable income/loss =      (-$187500)

Burhcham corporation has made a loss of (-$187500) which means Burcham has no tax liability this year.

Assuming a tax rate of 34% and that tax losses can be carried backward.

A tax relief could be claimed by Burhcam corporation as follows.

Burcham corporation's prior-year taxable income was $117000 so the tax relief is equal to $117000×34%=$39780

Current income tax benefit = $39780

The remaining $70500 ($187500 - 117000) net operating loss will be recorded as a deferred tax asset with the amount of tax (i.e $70500×34%) $23970.

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