Generally, deductions for additions to reserves for estimated future costs (e.g., an allowance for estimated warranty costs) are not allowed for Federal income tax purposes because allowing the deduction would:
A)Result in a mismatching of revenues and expenses.
B)Violate established public policy.
C)Violate the all events test and economic performance requirement.
D)Violate the tax benefit rule.
E)None of these.

Question

Quizplus · Accepted Answer

Deductions for additions to reserves for estimated future costs are not allowed because they violate the all events test and economic performance requirement. The all events test requires that all events needed to establish a liability have occurred, and economic performance requires that the liability has been incurred and the related goods or services have been provided. Estimating future costs does not meet these requirements, and therefore the deduction is disallowed.

Generally, Deductions for Additions to Reserves for Estimated Future Costs