This question tests book-to-tax adjustments for computing C corporation taxable income. The starting point is book income of $600,000, which must be adjusted for permanent and temporary differences. Tax-exempt municipal bond interest ($90,000) is included in book income but excluded from taxable income, requiring a decrease. The depreciation difference ($110,000 tax less $70,000 book = $40,000) requires an increase to reflect higher tax depreciation. Fines and penalties ($12,000) are nondeductible for tax purposes but were deducted for book purposes, requiring an add-back increase. Meals expense ($20,000) is only 50% deductible for tax ($10,000), so the nondeductible portion ($10,000) must be added back. Answer A incorrectly increases rather than decreases for tax-exempt income. Answer B incorrectly decreases for the depreciation difference and adds back only 50% of meals. Answer D incorrectly adds back 100% of meals and decreases for fines. The correct adjustments follow the pattern: subtract tax-exempt income, add favorable temporary differences, and add back nondeductible expenses.

This question tests the deductibility of various C corporation expenses under the Internal Revenue Code. Federal income taxes ($22,000) are specifically nondeductible under section 275(a)(1). State income taxes ($45,000) are deductible as ordinary and necessary business expenses under section 164. Penalties for late filing ($8,000) are nondeductible under section 162(f), which disallows deductions for fines and penalties paid to governmental entities. Officer compensation ($30,000) is deductible under section 162(a) as reasonable compensation for services rendered. Answer B incorrectly suggests all cash payments are deductible. Answer C incorrectly includes federal income taxes as deductible. Answer D incorrectly excludes state income taxes from deductible items. The key principle is that C corporations can deduct state taxes and reasonable compensation, but not federal taxes or penalties.