Cadillac Square Corporation determined that 1220000 of its d

Cadillac Square Corporation determined that $1,220,000 of its domestic production activities deduction (DPAD) on its current year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment of the company’s potential tax benefit from the deduction and its probability of occurring.

What amount of the tax benefit related to the uncertain tax position from the domestic production activities deduction can Cadillac Square Corporation recognize in calculating its income tax provision in the current year?

Solution

$298,550, the amount that has a cumulative probability of more than 50% of occurring. Cadillac Square Corporation would record an increase in its income taxes payable (income tax expense) of $116,250, the difference between the full benefit received on the tax return and the expected benefit to be received after audit by the IRS.