Jan 07, 2016
Mr. Swindex
THE DEDUCTIBLES Negar Dastjerdi Rachel Abourbih Sri Charan Sunkara Nadim Shamseddine Steven Yasmine
INTRODUCTION & FINANCES
Sales Cost of Sales
Gross Margin Other Expenses
Operating Income Before Taxes Other Income & Losses
Income Before Taxes
$ 3,000,000 ($ 1,570,000)
$ 1,430,000 ($ 955,000)
$ 475,000 $ 75,000
$ 550,000
Mr. Swindex
CEO & 100% shareholder
Glass cleaner for Cars
PART A: ANALYSIS
Landscaping $10,000 capitalized
Although this is a capital item, it is specifically allowed as a deduction in the year paid
Bond discount amortization $500
Permitted expense considered an interest expense
Interest on deficient corporate tax instalments
Interest paid to CRA on late payments cannot be deducted
ADD BACK
PART A: ANALYSIS
Reserve for inventory declines $26,300
Fails Reserve Test and cannot be deducted
Interest paid on bonds issued $22,000
Interest paid is generally deductible
Broker fees to obtain bond financing $5,000
Financing expenses are a permitted expense as a deduction in equal portions over 5 years
No effect
PART A: ANALYSIS
Advertising in magazine distributed only in US $22,000
Deductible if ads are directed primarily at Americans
Sponsoring local hockey team $3,200
Permitted expense if it satisfies 6 conditions found in the Income Tax Act
Attending Hockey Games with customers $2,000 (including meals and drinks)
50% of meals and entertainment is deductible as long as incurred for the purpose of earning an income
No effect
No effect
PART A: ANALYSIS
Membership fees for golf club $7,000
Denied expense
Convention expenses $30,000
Permitted expense
Damages paid for breach of contract $18,000
Damages are deductible since they were incurred to generate or produce an income
No effect
No effect
PART A: ANALYSIS
Loss from theft by an employee $2,800
Losses of inventory through theft of an employee are considered inherent risk in carrying on business and are therefore deductible CRA
Political donation $2,000
Denied expense
Advertising circulars (1/2 distributed) $15,000
Portion of undistributed circulars (1/2) are considered deferred charges and are not deductible in this period
No effect
PART A: ANALYSIS
Net Income per Financial Statement
Add:
Deduct:
NET INCOME FOR TAX PURPOSES
$ 550,000
$ 590,000
$500
1,700
Bond discount amortization
Interest on deficient corporate taxes 26,300
Reserve for inventory decline
($ 10,000)
Landscaping
Hockey games with customers
1,000
Golf club dues Political contribution
7,000
Broker fees for bond financing
4,000
2,000
Undistributed advertising circulars 7,500
PART B: ANALYSIS
Issue: Swindex Inc. sold land and earned a profit of $100,000. Should this profit be considered business income or a capital gain?
After purchase, Swindex Inc. began plans to develop properties into shopping plazas.
Demonstrates companys intention to derive long-term benefit from properties.
Land should be treated as capital property and when sold results in capital gain ($50,000 taxable).
EFFECT ON TAX IN YEAR 2014
$100,000 0.25 = $25,000
($100,000 0.5 ) 0.25 = $12,500
$ 12,500
What they paid:
What they SHOULD HAVE paid:
What they get as tax credit:
RULE OF THUMB TO REDUCE TAX LIABILITY
Sell your capitals when you are on higher tax bracket
Make use of more deductible expenses when you expect your income to be about $500,000
Ensure evidence is kept at least for three years
Do not exceed convention expense when you are in high tax bracket