Brad Pitt, owner of a small car repair and engine service business, operates his
ID: 2510174 • Letter: B
Question
Brad Pitt, owner of a small car repair and engine service business, operates his business as a C corporation with a December 31 year-end. He has three employees, including himself. The following expenses, along with $565,000 of gross income, are reported in the corporation’s financial statements.
Employee 1 salary $ 28,000
Employee 2 salary 28,000
Brad Pitt’s salary 45,000
Building rent 24,000
New Machinery purchased for the year 100,000
Depreciation of machinery for the year 10,000
Insurance coverage for all assets in the business 5,000
Insurance coverage on Brad Pitt’s personal residence 3,000
Consulting Fees 5,000
Utilities 2,000
Taxes and Licenses 12,000
Fine paid to City 4,000
Advertising 3,000
Interest Expense 5,000
Charitable contributions 20,000
Political Contributions 27,000
Dues paid to Small Engine Repair Institute 1,000
Mileage on car for personal use 2,500
House Cleaning expenses on personal residence 1,000
Janitorial expense for business 5,000
Brad Pitt would like to know the amount of his deductible expenses for tax purposes. Please explain to Brad Pitt as to why each item listed above is deductible or non-deductible expense for tax purposes.
Explanation / Answer
Answer:-
Expenses Deductible/ Non- Deductible Reason Employee 1 salary Deductible The salaries, wages, commissions, and bonuses you have paid to the employees of your business are tax-deductible expenses Employee 2 salary Deductible The salaries, wages, commissions, and bonuses you have paid to the employees of your business are tax-deductible expenses Building rent Deductible Building rent are treated as business expense so it is allowed as Deduction for Tax purose. New Machinery purchased for the year Non-Deductible Capital Expenditure are not allowed as deduction. Depreciation of machinery for the year Deductible Treated as Business Expense Insurance coverage for all assets in the business Deductible Business Expense Insurance coverage on Brad Pitt’s personal residence Non-Deductible Personal Expense are not allowed as deducition for Tax purpose Consulting Fees Deductible Business Expense Utilities Deductible It seems like Utilities cost is incurred for Business purpose so allowed as deduction. Taxes and Licenses Deductible Treated as Business Expense Fine paid to City Deductible Allowed for tax purpose but Fine paid to Government authority like Income Tax, Fine for GST are not allowed as deduction for Tax purpose. Advertising Deductible Business Expense Interest Expense Deductible Business Expense Charitable contributions Deductible subject to certain Limits Allowed for Tax purpose but maximum of 5 % of Net Profit Political Contributions Non-Deductible Political Contributions are not allowed as deduction for Tax calculation. Dues paid to Small Engine Repair Institute Non-Deductible It is not deductible for tax purpose as it related to earlier period. Mileage on car for personal use Non-Deductible Personal Expense are not allowed as deducition for Tax purpose House Cleaning expenses on personal residence Non-Deductible Personal Expense are not allowed as deducition for Tax purpose Janitorial expense for business Deductible Business Expense Brad Pitt’s salary Non-Deductible A sole proprietor is not entitled to tax deductions on salary paid to himself because these payments are not business expensesRelated Questions
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