Question

In the current year, C Inc. had the following expenses: $3,000 legal fee to register a mortgage on its office building, $8,000 for landscaping the land around the office building and $900 interest paid to CRA for late tax instalments. The legal fee and landscaping expenses were accrued in the current year and paid in the following year. Determine the amount that C’s net income for tax purposes will decrease in the current year due to these expenses.

Answer 1

Businesses pay taxes on their net income. Net income, is not the same as revenue, however. To calculate the net income, you need to start with the firm's revenues and deduct the relevant expenses located on the income statement.

1. Write down the total sales revenue for the firm. This figure can be found on the income statement.

2. Subtract the cost of goods sold as they appear on the income statement to get the gross profit.

3. Subtract the sales, general and administrative costs, as they appear on the income statement, from the gross profit. This gives you the earnings before interest, tax, depreciation and amortization.

4. Subtract any depreciation and amortization on properties from the earnings before interest, tax, depreciation and amortization. If there is any depreciation or amortization, it will be listed on the income statement. This gives you the earnings before interest and taxes.

5. Subtract any interest expenses listed on the income statement from the earnings before interest and taxes. This gives you the net income for tax purposes.

Even though the legal fee ($3000)and landscaping expenses($8000) were accrued in the current year and paid only in the following year , those expenses are also allowed for deduction because Net income is calculated on accrual basis

Hence

the amount that C’s net income for tax purposes will decrease in the current year due to these expenses is

$ 11900 ( legal expenses $3000+ landscaping expense $8000 +$900 interest paid to CRA for late tax instalments)