(1) Palo Alto is considering purchasing property in California to build its corporate headquarters. The land had previously been used by a manufacturing company, leaving the soil and groundwater contaminated with hazardous waste. To use the property for its needs, Palo Alto will pay for environmental remediation costs to clean up the land. In addition to the purchase price of $800,000, Palo Alto estimates these environmental cleanup costs will be close to $300,000. Should they purchase the property, Palo Alto wants to deduct the full cost of the environmental remediation on this years taxes as a trade or business expense. (2) Michael Smith has provided you with the current years income statement for Palo Alto, Inc. In the below spreadsheet, reconcile book income to taxable income.

	Palo Alto, Inc.
	Income Statement
	Current Year
			Book - Tax Adjustments
	Book Income/(Loss)		(DR)	Cr	Taxable Income
Revenue from sales	$64,800,000
Cost of Goods Sold	-45,600,000
Gross profit	$19,200,000
Other income:
Interest income	75,000	(1)
Miscellaneous income	80,000
Gross Income	$19,355,000
Expenses:
Compensation	-9,630,000	(2)
Stock option compensation	-350,000	(3)
Advertising	-1,950,000
Repairs and Maintenance	-658,000
Rent	-857,000
Bad debt expense	-50,000	(4)
Depreciation	-1,750,000	(5)
Warranty expenses	-95,000	(6)
Meals and entertainment	-60,000
Life insurance premiums	-25,000	(7)
Federal income tax expense	-1,250,000
Other expenses	-350,000	(8)
Total Expenses	-17,025,000
Net Income	2,330,000
Notes
(1)	Of the $75,000 interest income, $25,000 is from California State municipal bond.
(2)	This includes total officer compensaiton of $2,950,000 (no one officer received more than $1,000,000 compensation).
(3)	This amount is the portion of incenctive stock option compensation that was expensed during the year (recepiants are officers).
(4)	Palo Alto wrote off $35,000 of its accounts receivable as uncollectible.
(5)	Tax depreciation for the year was $2,300,000.
(6)	In the current year, Palo Alto did not make any actual payments on warranties it provided to customers.
(7)	Premiums on key employee life insurance policies
(8)	This includes $10,000 of Politial Contributions.