Compute the Income tax liability for the following company and discuss the reaso

Question

Compute the Income tax liability for the following company and discuss the reason(s) the item is considered deductible or non-deductible:

ABC Ltd reports $2 .6 M in profit for the year ended December 31, 2013, after charging the following:

Deprecation     $325,000

Legal Fees       $800,000

Donations      $42,000

Bad Debts        $156,000

Foreign Travel       $90,000

Gain on Disposal

of fixed Assets       $100,000

Legal fees are as follows:

-$500, 000 in respect to debt recovery

-$200,000 in relation to increase in share capital

-$100,000 in relation to defending a legal claim brought by an irate employee from    wrong full dismissal

Donations are as follows:

-$22,000 in relation to a football club not approved by the Commissioner of Taxes

-$20,000 in respect to UWI an approved institution

$26,000 for bad debt relates to a company that has gone out of business, the balance relates to bad debt as a percentage of debtors at the year end.

Foreign travel expense was for a vacation package for the purchasing manager's wife.

Prior year tax losses was $356,000 and the Income Tax rate is 25%

Explanation / Answer

Profit for the year                     2,600,000 Add: Expenses should not deducted Foreign Travel Expenses                          90,000 Bad debts recovery legal fees                        500,000 Donation to football club 22000 Defending a legal claim                        100,000 Bad Debts relates to business gone out                          26,000 Net income                     3,338,000 Net tax liabilty 25%                        834,500

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