Glen and Michael are equal partners in Trout Enterprises, a calendar year partnership. During the year, Trout Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $60,000. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael.
1. Answer a. Trout pays tax on $0 income, Glens taxable income increases by $60,000, and Michaels taxable income increases by $60,000.
b. Trout pays tax on $280,000 income, Glens taxable income increases by $60,000, and Michaels taxable income increases by $60,000.
c. Trout pays tax on $0 income, Glens taxable income increases by $200,000, and Michaels taxable income increases by $200,000.
d. Trout pays tax on $0 income, Glens taxable income increases by $140,000, and Michaels taxable income increases by $140,000.
e. None of the above.
2. The formula for the Federal income tax on corporations is not the same as that applicable to individuals.
true or false
3. Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?
1. The partnership pays no tax on either its ordinary income or its capital gains. Thus, answer b is incorrect. Here is how the remaining income is broken down:
Glen Michael Total
Operating income $200,000 $200,000 $400,000
This solution has three parts. The first discusses the taxation of partners' incomes in a partnership, the second discusses whether corporate and individual tax rates are the same, and the third discusses how to compute a company's income tax expense.