AC499 Unit 5 Corporate Tax Position Brief Example

Federal Tax of $227,123 From Balances Already Filed: A Unit 5 Capstone Tax Position Brief

[Student Name]

Purdue University Global

AC499: Bachelor's Capstone in Accounting

Unit 5 Tax Position Brief

[Instructor Name]

[Date]

Kettle Hollow Sauna Works and every figure are composite; the statute, case, publication and standards update cited are real; this is coursework analysis, not tax advice.

Memorandum

To: Chief Executive Officer, Kettle Hollow Sauna Works From: Capstone Accounting Team Date: November 20, 2026 Re: Federal income tax for the year ended September 30, 2026

The company owes $227,123 of current federal income tax for the year, and total tax expense on the income statement will be $248,228, leaving net income of $923,012. The difference between the two tax figures is deferred tax, explained below. We recommend against electing LIFO this year.

From Book Income to Taxable Income

Corrected pretax income is $1,171,240. Three differences carry it to taxable income of $1,081,540.

First, the warranty reserve's $55,500 increase is added back. For financial reporting, warranty expense is recorded when saunas are sold; for tax, it is deductible only as claims are actually honored, because economic performance occurs then. This is a temporary difference.

Second, the $162,000 panel saw placed in service on June 1 is expensed in full for tax under Section 179, against the $6,000 of book depreciation recorded in Unit 3 (Election to expense certain depreciable business assets, 26 U.S.C. § 179, 2018). The extra $156,000 deduction is a temporary difference that will reverse over the saw's remaining book life. The saw's cost sits well inside the annual dollar limit and the business income limit, and the deduction is an election made on the return (Internal Revenue Service, 2025).

Third, half of the $21,600 of business meals, $10,800, is added back because only 50 percent of meals is deductible. This difference is permanent.

Taxable income: $1,171,240 plus $55,500, less $156,000, plus $10,800, equals $1,081,540. At the 21 percent corporate rate, current federal tax is $227,123.

Deferred Tax

The warranty reserve of $97,500 will produce future deductions, so it supports a deferred tax asset of $20,475 at 21 percent; the opening asset was $8,820 on a $42,000 reserve. The panel saw's tax basis is now zero while its book value is $156,000, which produces a deferred tax liability of $32,760. Under current standards, deferred balances in the same jurisdiction are netted and shown as noncurrent, so the balance sheet reports a single net deferred tax liability of $12,285 (Financial Accounting Standards Board, 2015). Deferred tax expense for the year is the $32,760 liability less the $11,655 increase in the asset, or $21,105.

Total tax expense of $248,228 equals 21 percent of book income plus the nondeductible meals, which is the check that proves the current and deferred figures were split correctly rather than estimated separately.

Two Items That Are Deductible Now

The discontinued Cube model write-down of $30,820 is deductible this year. A write-down below cost is allowed for tax only when the goods are actually offered for sale at the lower price, a rule the Supreme Court enforced against an estimate-based write-down (Thor Power Tool Co. v. Commissioner, 1979). Here the company offered the units to dealers at the closeout price in September, before year end, so the write-down qualifies.

The $78,000 bonus accrued in Unit 3 is deductible this year because the obligation was fixed by September 30 and the bonus was paid on November 13, within two and a half months of year end.

What the Board Should Expect Next Year

The deferred liability on the panel saw will unwind over its remaining book life: each year the company records $18,000 of book depreciation with no matching tax deduction, so taxable income will run above book income by that amount and the liability will fall by about $3,780 a year. If the board approves the second profiling line and it is placed in service next year, expensing its $380,000 cost under the same election will create a new and larger difference in the opposite direction. The warranty asset will move with claims and new sales. None of these changes the total tax the company pays over time; they change only when it is paid.

The LIFO Election

With cedar prices up 18 percent, LIFO would cut this year's taxable income by roughly $96,400, worth about $20,244 of federal tax this year. Under the conformity rule, though, the method chosen for the return must also appear in the statements the bank and shareholders receive. Reported pretax income would therefore also fall by $96,400, narrowing the margin on the bank's fixed-charge coverage covenant just as the second profiling line adds debt service. We recommend revisiting LIFO next year, after the covenant is renegotiated.

This brief is coursework analysis and not tax advice; state income tax is outside its scope.

References

Election to expense certain depreciable business assets, 26 U.S.C. § 179 (2018).

Financial Accounting Standards Board. (2015). Income taxes (Topic 740): Balance sheet classification of deferred taxes (Accounting Standards Update No. 2015-17). FASB.

Internal Revenue Service. (2025). How to depreciate property (Publication 946). U.S. Department of the Treasury.

Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979).