Chapter 11, Problem 7P

a.

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

The amount of charitable contribution deduction for the first year of C Corporation.

Answer to Problem 7P

The amount of allowed charitable contribution deduction for the first year is $\boxed{\text{\$14,500}}$ .

Explanation of Solution

As per the tax laws, Corporations are allowed a deduction for the qualified charitable contribution, it is allowed in the year of payment, or before the third month’s fifteenth day after the end of the tax year. It is limited to 10 percent of taxable income of the corporation, computed earlier to deduction of allowed charitable contribution deduction, capital loss carry backs, net operating loss carry backs, and the dividend received deduction. Any amount of excess contribution may be carry forwarded in 5 successive tax years, but the amount is limited to a 10 percent annual limitation for the carryover years, as the current year’s charitable contributions are deducted first.

As in the given situation for year 1, C Corporation has contributed in qualified charitable contribution $35,000 cash and has net operating income $145,000, and $25,000 dividend income (ownership below 20 percent).

So, the amount of allowed charitable contribution deduction for the first year will be:

  $\begin{array}{l}=\$145,000\times 0.1\\ =\$14,500\end{array}$

Therefore, the allowed charitable contribution for the first year is $\boxed{\text{\$14,500}}$ and, the excess amount $\$20,500\left(\$35,000-\$14,500\right)$ will be carry forwarded next 5 tax years.

b.

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

The amount of charitable contribution deduction for the second year of C Corporation.

Answer to Problem 7P

The allowed charitable contribution deduction for the second year is $\boxed{\text{\$15,000}}$ .

Explanation of Solution

As per the tax laws, Corporations are allowed a deduction for the qualified charitable contribution, it is allowed in the year of payment, or before the third month’s fifteenth day after the end of the tax year. It is limited to 10 percent of taxable income of the corporation, computed earlier to deduction of allowed charitable contribution deduction, capital loss carry backs, net operating loss carry backs, and the dividend received deduction. Any amount of excess contribution may be carry forwarded in 5 successive tax years, but the amount is limited to a 10 percent annual limit for the carryover years, as the current year’s charitable contributions are deducted first.

As in the given situation for year 2, C Corporation has contributed to qualified charitable contribution $5,000 cash and has a net operating income of $150,000.

So, the amount of allowed charitable contribution deduction for the second year will be:

  $\begin{array}{l}=\$150,000\times 0.1\\ =\$15,000\end{array}$

Thus, $15,000 maximum deduction available for contribution in the second year of which $5,000 is adjusted against the current year’s contribution and the last year’s unadjusted contribution will be adjusted up to $\$10,000\left(\$15,000-\$5,000\right)$ .

Therefore, the allowed charitable contribution for the second year is $\boxed{\text{\$5,000}}$ and, $10,000 is also adjusted against the currents years’ allowable deduction, and the remaining amount will be adjusted in next year’s that is $\$10,500\left(\$20,500-\$10,000\right)$ , so the total amount of allowed charitable contribution for the second year will be $\$15,000\left(\$5,000+\$10,000\right)$ .

c.

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

Any amount of carryover of charitable contribution deduction left after the second year.

Answer to Problem 7P

The amount of carryover of charitable contribution deduction left after the second year is $\boxed{\text{\$10,500}}$ .

Explanation of Solution

As per the tax laws, Corporations are allowed a deduction for the qualified charitable contribution, it is allowed in the year of payment, or before the third month’s fifteenth day after the end of the tax year. It is limited to 10 percent of taxable income of the corporation, computed earlier to deduction of allowed charitable contribution deduction, capital loss carry backs, net operating loss carry backs, and the dividend received deduction. Any amount of excess contribution may be carry forwarded in 5 successive tax years, but the amount is limited to a 10 percent annual limit for the carryover years, as the current year’s charitable contributions are deducted first.

As in the given situation, C Corporation has contributed to qualified charitable contribution $5,000 cash and has a net operating income of $150,000.

So, the amount of allowed charitable contribution deduction for the second year will be:

  $\begin{array}{l}=\$150,000\times 0.1\\ =\$15,000\end{array}$

Thus, $15,000 maximum deduction available for contribution in the second year of which $5,000 is adjusted against the current year’s contribution and the last year’s unadjusted contribution will be adjusted up to $\$10,000\left(\$15,000-\$5,000\right)$ .

Therefore, the allowed charitable contribution for the second year is $\boxed{\text{\$5,000}}$ and, $10,000 is also adjusted against the currents years’ allowable deduction, and the remaining amount will be adjusted in next year’s that is $\$10,500\left(\$20,500-\$10,000\right)$ , so the total amount of allowed charitable contribution for the second year will be $\$15,000\left(\$5,000+\$10,000\right)$ .

Hence, in the third year the amount of carryover charitable contribution for deduction is $10,500 calculated as under:

Allowed deduction of a charitable contribution	Allowed deduction	Adjusted amount	Adjusted carry back	Excess amount Carry forwarded
Year 1	$\$14,500$	$\$14,500$	-	$\$20,500\left(\$35,000-\$14,500\right)$
Year 2	$\$15,000$	$\$5,000$	$\$10,000$	$\$10,500\left(\$20,500-\$10,000\right)$

Therefore, the excess amount carry forwarded from year 2 is $\boxed{\$10,500}$ .