Rebecca is a calendar-year taxpayer who operates a business. She made the follow
ID: 2446055 • Letter: R
Question
Rebecca is a calendar-year taxpayer who operates a business. She made the following business-related expenditures in December of year 0. Indicate the amount of these payments that she may deduct in year 0 under both the cash method of accounting and the accrual method of accounting. (Leave no answers blank. Enter zero if applicable.) a. $2,900 for an accountant to evaluate the accounting system of Rebecca’s business. The accountant spent three weeks in January of year 1 working on the evaluation. b. $3,600 for new office furniture. The furniture was delivered on February 15, year 1. c. $5,200 for property taxes on her factory. d. $915 for interest on a short-term bank loan relating to the period from November 1, year 0 through January 31, year 1.
Explanation / Answer
Answer:a.$2900 under the cash method.Likely $2900 undet the accural method. Rebecca paid for the accounting services in advance and as long as she reasonably expected that accountant would finish the services within 3.6 months after the payment, she may treat the payment as economic performance.Here, since she made the payment in December and the accountant provided the services a month later,it is likely that she would qualify for the deduction in year 0.Otherwise she would need to deduct the $2900 in year 1 when the accountant provided the services.
Answer:b $0 under the cash and accural method. In this case, economice performance takes place as when the goods are provided to her.However, because the asset will provide a benefit for more than 12 months,she must capitalize the expenditure and she will begin depreciating in year 1 when she places the asset in service.
Answer:c $5200 under both the cash and accural method.Taxes are a payment liability and are therefore,absent a special election, deductible only when paid.
Answer:d $610 (the interest allocable to November and December) under both the cash and accural method.Even under the cash method taxpayers may not deduct interest expense in excess of the amount of accured interest.
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