If tax-free muni bond is included in the pretax income, I should subtract out that income for the purposes of “income taxes payable” because muni bond is not taxable.
But for deductible depreciation expense, why do I subtract the depreciation for taxable income? Following is the
Q) Lyon had pretax earnings of $150MM in its first year of operation. Pretax income included:
$25MM of interest income from tax-free muni bond
$15 MM of deductible depreciation expense that is not yet accrued.
A) So I should subtract $25MM of interest income from $150, but also subtract $15MM of deductible depreciation to get to taxable income? Depreciation expense has been already subtracted out from $150MM from what I understand so I don’t understand why it is subtracted again.
Thanks!!