Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and an income tax refund from 20X2 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 20X3 would be:

Question

Quizplus · Accepted Answer

To determine the current earnings and profits (CE&P), we start with taxable income and make certain adjustments. In this case, we need to add back the disallowed penalty of $25,000 and subtract the tax refund from 20X2 of $50,000 to arrive at the adjusted taxable income of $775,000 ($800,000 + $25,000 - $50,000).

Next, we need to adjust for items that are not included in taxable income but are included in CE&P. Life insurance proceeds are one such item. Therefore, we need to add back the $100,000 of life insurance proceeds to the adjusted taxable income of $775,000 to arrive at the CE&P of $875,000 ($775,000 + $100,000).

Therefore, the correct answer is C) $603,000.

Au Sable Corporation Reported Taxable Income of $800,000 in 20X3