Compute Sunland Corporation’s taxable income and income taxes payable for 2029 given: 2029 pretax financial income $1,484,000; equipment purchased 1/1/2028 for $1,320,000 depreciated straight-line over 8 years for financial reporting and 5 years for tax using the half-year convention; 2029 tax-exempt municipal bond interest $65,000; 2029 gain on discontinued operations $198,000 fully taxable; tax rate 20%; taxable income expected in future years.

What you are converting from book income to taxable income

You start with 2029 pretax financial income and then adjust for:

• Permanent differences (affect taxable income but never reverse, like tax-exempt interest).
• Temporary differences (timing differences that reverse later, like different depreciation methods/lives).

Depreciation for books vs. taxes (half-year convention)

Cost of equipment: $1,320,000

Financial reporting depreciation (straight-line, 8 years): $$\text{Book dep. per year} = \frac{1{,}320{,}000}{8} = 165{,}000$$ So, 2029 book depreciation = $165,000.

Tax depreciation (straight-line, 5 years with half-year convention): Straight-line rate is $1/5 = 20\%$. With the half-year convention:

• Year 1: $10\%$
• Years 2–5: $20\%$
• Year 6: $10\%$

Since the asset was placed in service in 2028, 2029 is Year 2 for tax depreciation: $$\text{Tax dep. in 2029} = 1{,}320{,}000 \times 20\% = 264{,}000$$

Difference affecting 2029 taxable income: $$\text{Tax dep.} - \text{Book dep.} = 264{,}000 - 165{,}000 = 99{,}000$$ Tax depreciation is higher, so taxable income is lower by $99,000.

Adjusting 2029 pretax financial income to get taxable income

Start with pretax financial income (book): $1,484,000.

1. Tax-exempt municipal interest is included in book income but not taxable:

• Subtract $65,000.

2. Depreciation timing difference (tax higher by $99,000):

• Subtract $99,000.

So, $$\text{Taxable income (2029)} = 1{,}484{,}000 - 65{,}000 - 99{,}000 = 1{,}320{,}000$$

Note: The $198,000 discontinued-operations gain is “fully taxable” and already included in pretax financial income, so it needs no adjustment.

Income taxes payable for 2029

With a 20% tax rate: $$\text{Income taxes payable} = 1{,}320{,}000 \times 20\% = 264{,}000$$

Quick check

Because the only permanent difference is tax-exempt interest (reduces taxable income) and tax depreciation exceeds book depreciation (also reduces taxable income), taxable income should come out less than $1,484,000, which it does.