Your tax senior has e-mailed you Oh Gnome You Didn’t, Inc.’s GAAP-basis trial balance and financial statements for the 2018 calendar year, prepared using Microsoft Excel, and has asked you to convert Gnome’s book income into taxable income within the same Excel workbook. The Excel workbook contains pre-formatted tabs you’ll need to complete to properly calculate taxable income.
Your tax senior has also asked you to prepare Form 1120, Schedule M-3 for Gnome once you have finished computing taxable income.
Please read each of the below instructions carefully as you complete this part of the project:
Step 1 – Taxable Income Calculation using Microsoft Excel
1.Open the file titled “Tax Compliance and Provision Project – Parts I and II.xlsx”.
2.The Financial Statements and Trial Balance can be found in the last 2 worksheets of the Excel workbook.
a.On the “Trial Balance” tab, make sure each of the accuracy checks calculated in red throughout the worksheet shows a result of zero.
3.You will ONLY be working with the PINK tabs for Part I of this project.
4.Click on the worksheet titled “Perm Book-Tax Differences”.
a.For each type of permanent difference, select the appropriate answer in the drop-down boxes within each of the cells shaded in GREEN (16 in total).
b.Hint – you will need to use the “Trial Balance” tab to help you determine the correct “Acct. Number” for the applicable cells.
5.Click on the worksheet titled “Temp Book-Tax Differences”.
a.Select the appropriate answer in the drop-down boxes within each of the cells shaded in GREEN (31 in total).
b.Hint – you will need to use the “Trial Balance” tab to help you determine the correct “Acct. Number” for the applicable cells.
c.There are also YELLOW cells (3 in total) that require manual numerical inputs. Enter 0 if applicable.
6.Once you’ve fully completed the Perm and Temp Book-Tax Differences tabs, select the “Book-to-tax Rec” worksheet.
a.The accuracy checkpoint should show a variance within +/- 1.0 (cell C30).
7.Save the completed Excel workbook (only the PINK tabs should be completed) and upload into the applicable Canvas assignment.
Continued…
Step 2 – Preparation of Schedule M-3 (Form 1120)
Your tax senior has also asked you to prepare Form 1120, Schedule M-3 for Gnome once you have finished computing taxable income.
Option 1
1.Print the file titled “Schedule M-3 – partially completed.pdf”.
2.Complete Parts II and III of Schedule M-3 by hand:
a.Locate the rows with book-tax differences and input the book-tax adjustment you calculated in Step 1, making sure you properly input the adjustment in the Temporary or Permanent columns on the Schedule M-3.
i.Compute the resulting taxable income/deduction and input your answer in column (d) of the applicable row.
b.Hint – in Part III, expense amounts are shown as positive amounts. Therefore, if a book-tax difference reduces book expense, you will show a negative number in the Temporary or Permanent columns.
c.The book-tax differences associated with capital losses and income tax expense have already been completed for you.
d.In Part III, total each column in Row 38 – column (a) has already been totaled for you.
e.in Part II, subtotal each column in Row 26 as instructed on the form – column (a) has already been subtotaled for you.
f.In Part II Line 27, fill in the amounts you totaled for each column in (d) above.
g.In Part II, input the total for each column in Row 30, following the specific instructions on the form.
3.Checkpoint – Schedule M-3 Part II Row 30 column (d) should equal the taxable income you calculated in Step 1 (on the “Book-to-tax Rec” Excel worksheet).
4.Scan the completed Schedule M-3 and upload into the applicable Canvas assignment.
Option 2
1.Access a fill-able version of Schedule M-3 at the following site: https://www.irs.gov/pub/irs-pdf/f1120sm3.pdf
2.Download the form to your hard drive.
3.Open the file titled “Schedule M-3 – partially completed.pdf” and input all information found in that form into your fill-able version of Schedule M-3.
4.Follow the instructions covered in Option 1, #2 above.
5. Checkpoint – Schedule M-3 Part II Row 30 column (d) should equal the taxable income you calculated in Step 1 (on the “Book-to-tax Rec” Excel worksheet).
6.Save the completed Schedule M-3 and upload into the applicable Canvas assignment.
AC312 – Tax Compliance and Provision – Part II Instructions
Your tax senior has approved your taxable income calculations for Gnome and has now asked you to prepare a tax provision using the results from your work in Part I of this project. You will be completing Part II of this project using the same workbook you uploaded to Canvas for Part I.
You will have to compute a few additional modifications to Federal taxable income when calculating the overall tax provision because Gnome files its state tax return in a state that doesn’t entirely follow Federal tax rules. Therefore, adjustments will be required to properly represent the impact of the variances between Federal and state taxable income.
Please read each of the below instructions carefully as you complete this part of the project:
Step 1 – Compute Current Provision
1.Open your saved Excel workbook you submitted to Canvas for Part I of this project. Make sure you have the final version that includes fully completed PINK tabs.
2.On the “Trial Balance” tab, make sure each of the accuracy checks calculated in red throughout the worksheet still show a result of zero.
3.You will ONLY be working with the ORANGE tabs for Part II of this project.
4.Click on the worksheet titled “Current Provision”.
a.In column B, select the Permanent and Temporary book-tax differences you previously calculated on the “Book-to-tax Rec” tab (green cells).
b.In column C, manually input the applicable book-tax differences you calculated in Part I (yellow cells).
i.Hint – Favorable differences should be shown as negative amounts (since they reduce book income), and vice-versa for Unfavorable differences.
ii.Hint – to avoid unintended typos, you should use an Excel formula to link the answers directly to the applicable cell in the “Book-to-tax Rec” tab.
5.Click on the worksheet titled “State Adjustments”.
a.The state only allows 50% bonus depreciation on fixed asset additions, as opposed to the 100% Federal bonus depreciation allowance.
i.Select the appropriate bonus depreciation allowances for state tax purposes (green cells).
ii.Input the Federal tax depreciation that you calculated in Part I (yellow cell). Try and use an Excel formula link to reduce inadvertent errors associated with manual data input.
iii.Indicate whether the adjustment should increase or decrease Federal taxable income to arrive at the allowable depreciation expense under the state’s income tax rules (green cells).
b.Gnome purchased its municipal bond from a different state, so Gnome is not allowed to exclude its net municipal interest income when computing state taxable income.
i.Indicate whether the required adjustments should increase or decrease Federal taxable income (green cells).
c.The state does not allow for companies to deduct state income tax expense when computing state taxable income.
i.Choose the Acct. Number associated with the state income tax expense that has been deducted in the Federal taxable income computation (green cell).
ii.Manually input the allowable state tax deduction (hint – enter 0 if the state doesn’t allow companies to take a state tax deduction).
iii.Indicate whether this adjustment related to state income tax expense should increase or decrease Federal taxable income (green cell).
6.Go back to the worksheet titled “Current Provision”.
a.In column G, input the applicable state adjustments you calculated on the “State Adjustments” tab (4 yellow cells).
b.Hint – adjustments you indicated should be an “Add-back” should be shown as positive amounts, and vice-versa for adjustments that resulted in a “Deduction” to Federal taxable income.
c.Hint – to avoid unintended typos, you should use an Excel formula to link the answer directly to the applicable cell in the “State Adjustments” tab.
d.The resulting Federal and State tax liabilities are shown in Purple in Rows 17 and 30. Beginning in cell F21, complete the following steps:
i.Indicate whether Gnome has current Federal income tax expense or benefit, and then manually input the amount (positive for expense, and vice-versa for benefit). Try and link the amount using an Excel formula to avoid inadvertent data entry errors.
ii.Indicate whether Gnome has current state income tax expense or benefit, and then manually input the amount (positive for expense, and vice-versa for benefit). Try and link the amount using an Excel formula to avoid inadvertent data entry errors.
iii.Indicate whether the total current Fed/State expense/benefit results in Tax Expense (should be a positive number) or Tax Benefit (should be a negative number).
7.Once you’ve fully completed the above steps, the accuracy checkpoint on the “Current Provision” tab should show a variance within +/- 1.0 (cell G26).
Continued…
Step 2 – Compute Deferred Provision
1.Click on the worksheet titled “Deferred Provision”.
2.In column D, select the book-tax differences that should be incorporated into the deferred tax provision calculation.
a.The first box represents the Federal deferred tax activity. The second box represents the State deferred tax activity.
3.In column F, manually input the current year book-tax differences. Favorable differences should be shown as negative amounts (since they represent future taxable differences), and vice-versa for Unfavorable differences.
a.Hint – to avoid unintended typos, you should use an Excel formula to link the answers directly to the applicable cell.
4.In column H, indicate whether each type of book-tax difference results in a Deferred Tax Asset or Liability, including the total amounts for both Federal and State.
5.The resulting Federal and State net deferred tax assets/(liabilities) are shown in Rows 18 and 34. Beginning in cell K7, complete the following steps:
a.Indicate whether Gnome has deferred Federal income tax expense or benefit, and then manually input the amount (positive for expense, and vice-versa for benefit). Try and link the amount using an Excel formula to avoid inadvertent data entry errors.
b.Indicate whether Gnome has deferred state income tax expense or benefit, and then manually input the amount (positive for expense, and vice-versa for benefit). Try and link the amount using an Excel formula to avoid inadvertent data entry errors.
c.Indicate whether the total deferred Fed/State expense/benefit results in Tax Expense (should be a positive number) or Tax Benefit (should be a negative number).
6.Once you’ve fully completed the above steps, the accuracy checkpoint on the “Deferred Provision” tab should show a variance within +/- 1.0 (cell L12).
Continued…
Step 3 – Complete Income Tax Footnote Information
1.Click on the worksheet titled “Income Tax Footnote”.
2.In the “Effective Tax Rate Reconciliation” box, manually input Gnome’s pre-tax book income/(loss). This amount is found on the “Book-to-tax Rec” tab and should be linked using an Excel formula to avoid inadvertent errors.
3.The rest of the “Effective Tax Rate Reconciliation” should automatically populate but take some time to look at the formulas in the pre-populated cells to ensure you understand where the information is coming from.
4.In the “Tax Effects of Temporary Differences” box, select the book-tax differences that created a Deferred Tax Asset, and those that created a Deferred Tax Liability.
5.In column G of the “Tax Effects of Temporary Differences” box, manually input the Federal and state tax-effected deferred amounts.
a.For example, if your Fixed Assets Gross Deferred Tax Liability amount was (100,000) for Federal and (50,000) for state, then the total tax-effected Fixed Asset Deferred Tax Liability would be (100,000) * 21% Federal rate + (50,000) * 4.94% net state rate = (21,000) + (2,470) = (23,470).
b.Deferred tax liabilities should be shown as negative amounts and vice-versa for deferred tax assets.
c.Hint – to avoid unintended typos, you should use an Excel formula to link the answer directly to the applicable cells in the “Deferred Provision” tab.
6.In the “Tax Attribute Carryforwards” box, select the two types of temporary differences that have resulted in deductions being carried forward to future tax years.
7.In column J of the “Tax Attribute Carryforwards” box, manually input the gross deduction amount that will be carried forward to next year. (Hint – both amounts can be linked directly from the “Book-to-tax Rec” tab).
8.In column K of the “Tax Attribute Carryforwards” box, select the year any unutilized deductions will expire, following the expiration rules for the applicable tax attribute.
9.Once you’ve fully completed the above steps, the accuracy checkpoints on the “Income Tax Footnote” tab should show a variance within +/- 1.0 (cells C31 and G27).
10.Save the completed Excel workbook (ALL tabs should be completed) and upload into the applicable Canvas assignment.
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