Joe's Widget Manufacturers Inc. (JWMI) is an established manufacturing company with a growing research and development (R&D) department. JWMI is a Canadian-controlled private corporation with no associated companies. The research part of the business is new and the company's accountant has no experience dealing with the tax implications of the expenditures in this area. He has correctly computed the company's net income for tax purposes before specific R&D related adjustments as $615,000 and would like your input on the impact of the transactions described below.
For the year ended December 31, 2012, the following R&D related expenditures were made.
Description Amount Purchase of lab machinery and lab equipment $450,000 Purchase of a new building to house laboratory 120,000
Salaries of lab staff 100,000
Operating costs directly related to the lab .... 40,000
The lab machinery, equipment and building are used 100% for R&D activities. The lab machinery and equipment have been capitalized for accounting purposes and are being amortized over an eight-year period (net of available investment tax credits as set out below). Thus, amortization expense of $36,562 was recorded for accounting purposes on the lab machinery and equipment. Amortization expense of $4,800 was recorded on the building.
The company is eligible for investment tax credits at a rate of 35% and has correctly determined that they are eligible for investment tax credits at this rate on all of the above expenditures with the exception of the building. No investment tax credit is allowable on the purchase price of the building. For accounting purposes, the company's accountant has netted the investment tax credits against the related expenditures as follows.

REQUIRED
Based on the above information, explain to JWMI's accountant the adjustments necessary in computing income for tax purposes for the years ended December 31, 2012 and 2013.

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Amount recorded Jor accounting purposes $292,500 120,000 Expenditure Gross amount ITC Lab machinery and equipmen$450,000 120,000 100,000 40,000 $157,500 Salaries of lab staff . Operating costs of lab... 35,000 14,000 65,000 26,000