Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $25,000 of § 179 expense. It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Tern's current E & P is:

Question

Quizplus · Accepted Answer

Tern's current E&P is calculated as follows:
Taxable income: $500,000
§ 179 expense deduction: ($25,000)
Related party loss: $20,000
Realized gain from involuntary conversion: $75,000
Nondeductible fines: (+$10,000)
Taxable income for E&P purposes: $580,000
Federal income tax: (-$150,000)
Current E&P: $430,000

However, since the fine was nondeductible, it must be added back to arrive at Tern's current E&P:
$430,000 + $10,000 = $440,000

Therefore, the correct answer is (C) $340,000.

Tern Corporation, a Cash Basis Taxpayer, Has Taxable Income of $500,000