East Side Products Ltd$.($ESP$)$ recently expanded its business by acquiring the operations of a competitor. As a result of the

expansion, additional office space was needed. On the first day of the current fiscal year, ESP rented additional premises

under a five$-$year lease agreement with two three$-$year renewal options. As an inducement to sign the lease, the landlord

paid ESP $$20,000$ to cover part of the cost of improving the offices. Before occupying the premises, ESP spent $$38,000$ for

necessary renovations.

Profits from business operations for the current year are expected to be $$175,000.$ Because of the expansion, future years'

profits are expected to exceed $$550,000$ annually.

For several years, ESP had invested its excess cash from annual profits in secure bonds. The proceeds from all of these

bonds were used to acquire the competitor's business. For the next several years, the company will again invest excess

cash in secure bonds; it expects to earn an average yield of $9\%.$

ESP is a Canadian$-$controlled private corporation. The first $$500,000$ of annual business profits are subject to a $13\%$ tax rate.

Annual business profits over $$500,000$ are taxed at $27\%.$

Required:

Describe the alternative tax treatments for the inducement payment. Which treatment should ESP use? Show a detailed

calculation that compares the tax cost of each alternative. Assume the renovations to the leased premises are not

designated immediate expensing property.