In the current year, Tanager Corporation (a calendar year C corporation) had operating income of $480,000 and operating expenses of $390,000. In addition, Tanager had a long-term capital gain of $55,000 and a short-term capital loss of $40,000.
(a) Compute Tanager’s taxable income and tax for the year.
(b) Assume the same facts except that Tanager's long-term capital gain was
$15,000. Compute Tanager’s taxable income and tax for the year.

(a) Tanager Corporation taxable income is $9,000 and its tax for the year is $1,890.

(b) Tanager Corporation taxable income is still $9,000 and its tax for the year is still $1,890.

Explanation:

(a) Compute Tanager’s taxable income and tax for the year.

Step 1: Calculation of tax ordinary taxable income

Ordinary taxable income = Operating income - Operating expenses

                                          = $480,000 - $390,000

Ordinary taxable income = $9,000

The US Corporate tax rate is presently 21%. This is applied to the ordinary taxable income as follows:

Ordinary income tax = Ordinary taxable income × Corporate tax rate

                                  = $9,000 × 21%

Ordinary income tax = $1,890  

Step 1: Calculation of capital gain tax

In the US, capital loss from the short or long term capital is deductible to the extent of the available other capital gains either short or long term capital gains but cannot be deducted from ordinary income for the period. Therefore, tax on taxable capital gains is calculated as follows:

Taxable capital gains = long-term capital gain - short-term capital loss

                                     = $55,000 - $40,000

Taxable capital gains = $15,000

Since the capital gain falls between $0 and $39,375, Tanager Corporation will pay zero tax on taxable capital gains of $15,000.

Therefore, Tanager Corporation taxable income is $9,000 and its tax for the year is $1,890.

(b) Assume the same facts except that Tanager's long-term capital gain was  $15,000. Compute Tanager’s taxable income and tax for the year.

Since only Tanager's long-term capital gain of  $15,000 was different, we recompute the capital gain/loss and capital gain tax as follows:

Taxable capital gains/loss = long-term capital gain - short-term capital loss

                                     = $15,000 - $40,000

Capital loss = - $25,000

Since Tanager is a corporation, it is not allowed to deduct excess capital loss of $25,000 from the ordinary taxable income.

Therefore, Tanager Corporation taxable income is still $9,000 and its tax for the year is still $1,890.

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