Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: $\begin{array}{lrrr}
&\text { Wave}&\text { Surt}\
\text { Ordinary operating income (loss) } & \$ 500,000 & \$(100,000 \
\text { Capital gain (loss) } & (5,000) & 7,000\
\text { Section } 1231 \text { gain (loss) }&3,000&(10,000)
\end{array}$
Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Question

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: $\begin{array}{lrrr}
&\text { Wave}&\text { Surt}\
\text { Ordinary operating income (loss) } & \$ 500,000 & \$(100,000 \
\text { Capital gain (loss) } & (5,000) & 7,000\
\text { Section } 1231 \text { gain (loss) }&3,000&(10,000)
\end{array}$
 Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Quizplus · Accepted Answer

To calculate consolidated taxable income, we first add up the separate taxable incomes of both Wave and Surf, which is $200,000 and $205,000 respectively. Then we eliminate intercompany transactions, which are profits or losses that occur between the two corporations. Since Wave owns 90% of Surf, we eliminate 90% of Surf's taxable income, which comes out to be $184,500 (90% x $205,000).

Therefore, the consolidated taxable income would be $200,000 + ($205,000 - $184,500) = $220,500.

Wave Corporation Owns 90% of the Stock of Surf, Inc