Redwood Corp., a C corporation, had book income of $500,000. Included in book income was $10,000 of municipal bond interest. The corporation paid $5,000 in premiums on a key-person life insurance policy (corporation is beneficiary). What is Redwood's taxable income?

Answer options:

$490,000

$495,000

$505,000

$485,000

How to approach this question

Book to Tax: Start with Book. Add back non-deductible expenses (Life Ins). Subtract non-taxable income (Muni Bond).

Full Answer

B.$495,000✓ Correct

Municipal bond interest is income for books but not tax (subtract $10,000). Key-person life insurance premiums (where corp is beneficiary) are expenses for books but not deductible for tax (add back $5,000). $500,000 - $10,000 + $5,000 = $495,000.

Common mistakes

Deducting the insurance premiums or adding the bond interest.

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