Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for advertising time during a professional golftournament which will occur once in April of next year. What amount of these payments, if any, can Ajax deduct this year?

Question

Quizplus · Accepted Answer

Under the accrual method, Ajax can deduct the advertising expenses in the tax year in which they are incurred and are truly "paid or incurred," which means they are both economic and legal obligation of the company. The fact that the television advertising time won't occur until February of the next year does not prevent Ajax from deducting the $1 million paid for it in November of the current year as long as the amount is an economic and legal obligation of Ajax. The $500,000 paid for the professional golf tournament is deductible this year as well, even though the tournament will not occur until April of the following year. The rule for prepaying expenses states that businesses can deduct under the accrual method prepaid expenses for services that do not extend beyond the earlier of 12 months after the first date on which the taxpayer has the right to the services or the end of the taxable year following the year of prepayment. Therefore, because the golf tournament does not extend beyond 12 months after the first date on which Ajax has the right to the services and does not go beyond the end of the taxable year following the year of prepayment, it is deductible this year. Overall, the advertising payments made this year by Ajax total $1.5 million and they are both deductible this year.

Ajax Computer Company Is an Accrual Method Calendar Year Taxpayer