Wailes Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Wailes' Federal taxable income is $750,000, which includes a $75,000 deduction for state income taxes. During the year, Wailes received $20,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Wailes' taxable income for X purposes is:

Question

Quizplus · Accepted Answer

Wailes' starting point for X taxable income is its Federal taxable income of $750,000, which includes the $75,000 deduction for state income taxes. However, X tax law does not allow a deduction for state income tax payments, so this deduction must be added back to Federal taxable income.

Additionally, the $20,000 interest on Federal obligations must be included in X taxable income since Wailes is only subject to tax in State X.

Thus, Wailes' X taxable income is calculated as follows:
Federal taxable income: $750,000 
Add back state income tax deduction: +$75,000 
Interest on Federal obligations: +$20,000 
X taxable income: $805,000

Wailes Corporation Is Subject to a Corporate Income Tax Only