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IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation

A company in India computes its taxable profit from its accounting profit. Which of the following adjustments is normally made when moving from accounting profit to taxable profit?

Depreciation charged in the accounts is added back and tax-allowed depreciation is deducted in its place. Tax law uses its own allowance rules, whereas wages, business interest and similar trading costs are normally deductible, and dividends and the tax charge itself are not.

  1. AAdd back depreciation charged in the accounts and deduct tax-allowed depreciation insteadCorrect
  2. BDeduct the dividends proposed to shareholders as a business expense
  3. CAdd back wages and salaries paid to employees
  4. DDeduct the corporate tax charge itself as an allowable expense
  5. Add back interest paid on business loans in every case

Explanation

Accounting depreciation is a non-cash charge that tax rules do not accept, so it is added back and replaced with the depreciation allowed under tax law. Dividends are an appropriation of profit, not an expense. Wages and business loan interest are normally deductible, and tax on profit is not deductible against itself.

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