Question

Aztec Corp. is calculating its current E&P and is considering the following items: Federal income taxes paid $50,000, Political contributions to the state governor's race $5,000, Fines and penalties $1,000, Ordinary and necessary business expenses $50,000, Salaries paid to owner/employees $30,000. Which of the items above should Aztec deduct when adjusting its taxable income to get to E&P?

1) Federal income taxes paid
2) Political contributions to the state governor's race
3) Fines and penalties
4) Ordinary and necessary business expenses
5) Salaries paid to owner/employees

Answer 1

Aztec Corp. should deduct federal income taxes paid, fines and penalties, and ordinary and necessary business expenses when adjusting its taxable income to get to E&P. Political contributions to the state governor's race and salaries paid to owner/employees should not be deducted.

Step-by-step explanation:

Aztec Corp. should deduct the following items when adjusting its taxable income to get to E&P:

1. Federal income taxes paid: These taxes should be deducted because they are paid to the government and are an ordinary and necessary business expense.
2. Fines and penalties: These should be deducted as they are not considered ordinary and necessary business expenses.
3. Ordinary and necessary business expenses: These should also be deducted as they are a necessary part of operating a business and generating income.

The items that should not be deducted are:

1. Political contributions to the state governor's race: Political contributions are not considered ordinary and necessary business expenses and therefore cannot be deducted.
2. Salaries paid to owner/employees: While salaries are an ordinary and necessary business expense, they are not deducted when calculating E&P as they are considered part of the taxable income.