Task: Glen and Michael are equal partners in Trout Enterprises, a calendar year partnership. During the year, Trout Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $60,000. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael.
Problem 1.
a. Trout pays tax on $0 income, Glens taxable income increases by $60,000, and Michaels taxable income increases by $60,000.
b. Trout pays tax on $280,000 income, Glens taxable income increases by $60,000, and Michaels taxable income increases by $60,000.
c. Trout pays tax on $0 income, Glens taxable income increases by $200,000, and Michaels taxable income increases by $200,000.
d. Trout pays tax on $0 income, Glens taxable income increases by $140,000, and Michaels taxable income increases by $140,000.
e. None of the above.
Problem 2. The formula for the Federal income tax on corporations is not the same as that applicable to individuals.
Problem 3. Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?
a. $252,000.
b. $42,000.
c. $210,000.
d. $168,000.