Repair and annual leave for (a,b,c)—about the increase and decrease Essay Example
1. Adjustment of the net income with the annual leave expenses
Firstly, we need to determine whether the annual leave expenses an allowable deduction or not. According to section 26.1 of the Income tax assessment Act 1997, expenses incurred by a business on compensation of their employees for annual leave, long leave service or sick leave are not deductible on the assessable income. The Act further states, the expenses may be deducted if the leave expenses are paid to a dependents of a deceased employee or the leave from a previous year is paid in the year of income.
Hence, in our case at hand, the leave expenses they should be added back to the net income to avoid understating the assessable income. To adjust the net income, the computation should be done as shown below.
Increase to Net Income = Net Income + Annual Leave expenses
Adjustment to Increase Net Income = $178,000 + $24,000 = $ 202,000
2. Adjustment of the Net income with the repairs and maintenance expenses
The amount incurred on repairs and expenses allowable deductions that are used to reduced the assessable income. The $ 3,000 used to remove the carpet is an allowable deduction since the carpet was not replaced with a new one. Nevertheless, had the carpet been replaced, the amount used in replacement would amount in a capital asset and hence used to decrease the net income. Hence, since the deduction was made during the preparation of the financial statement, no adjustment should be made on the net income during the computation of the taxable income.
In summary, the net income = $178,000
Allowed deductions included in the computation
Increase to net income by Annual leave expenses = $ 24,000
Taxable Income = $202,000
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