Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year end, Big Homes had paid $12,000 inrebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Question

Quizplus · Accepted Answer

Under the accrual method, a liability can be deducted in the year it is incurred, even if it is not paid until a later year. The $7,500 liability is considered fixed and determinable because it is based on actual sales and there is a reasonable estimate of the amount owed. If the total amount of $19,500 is material to Big Homes' financial statements, it may be required to disclose the liability in the footnotes. Additionally, Big Homes must expect to pay the accrued rebates before filing their tax return for this year.

Big Homes Corporation Is an Accrual Method Calendar Year Taxpayer