ExpertHard1 markMultiple Choice
CPA · Question 31 · Area V: Entity Taxation
Redwood Corp., a C corporation, had book income of $500,000. Included in book income was $10,000 of municipal bond interest. The corporation paid $5,000 in premiums on a key-person life insurance policy (corporation is beneficiary). What is Redwood's taxable income?
Redwood Corp., a C corporation, had book income of $500,000. Included in book income was $10,000 of municipal bond interest. The corporation paid $5,000 in premiums on a key-person life insurance policy (corporation is beneficiary). What is Redwood's taxable income?
Answer options:
A.
$490,000
B.
$495,000
C.
$505,000
D.
$485,000
How to approach this question
Book to Tax: Start with Book. Add back non-deductible expenses (Life Ins). Subtract non-taxable income (Muni Bond).
Full Answer
B.$495,000✓ Correct
B
Municipal bond interest is income for books but not tax (subtract $10,000). Key-person life insurance premiums (where corp is beneficiary) are expenses for books but not deductible for tax (add back $5,000). $500,000 - $10,000 + $5,000 = $495,000.
Common mistakes
Deducting the insurance premiums or adding the bond interest.
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