D is corrent. The requirement is to determine Jagdon Corp.’s taxable income for the year, given book income of $150,000 that included $5,000 of interest from municipal bonds, a $10,000 deduction for a net capital loss, and a $50,000 deduction for federal income tax expense. In computing a corporation’s taxable income, municipal bond interest is tax-exempt and excluded from gross income, while no deduction is allowed for a net capital loss nor federal income tax expense. As a result, Jagdon’s taxable income would be its book income of $150,000, reduced by the $5,000 tax-exempt municipal bond interest, and increased by the nondeductible net capital loss of $10,000 and $50,000 of federal income tax expense, or $205,000.
A is incorrect. The net capital loss cannot be deducted.
B is incorrect. The municipal bond interest is tax-exempt and the net capital loss is not deductible.
C is incorrect. The net capital loss must be added back to book income.
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