Color, Inc., is an accrual basis taxpayer.In December 2019, the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2020.Also, in December 2019, the company received a bill of $800 for office supplies that had been purchased and used in November 2019.The bill was not paid until January 2020.In January 2020, the company received a claim for $600 for defective merchandise purchased in 2019.Color paid the customer the $600 in February 2020.Assuming that Color uses the recurring item exception to economic performance, the company's deductions for 2019 as a result of these facts are:

Question

Quizplus · Accepted Answer

Under the recurring item exception, economic performance occurs when the item or service is provided, so long as the item or service is not a material item. Office supplies are considered a material item, so the economic performance occurs when payment is made. Therefore, the $800 office supply bill is deductible in 2020 when payment was made.

For the claims for defective merchandise, economic performance occurs when the customer makes the claim, not when payment is made. Therefore, the $500 claim received in December 2019 is deductible in 2019, even though payment was made in January 2020. The $600 claim received in January 2020 is deductible in 2019 because the merchandise was purchased in 2019.

Thus, the total deductions for 2019 from these facts are $500 + $600 + $800 = $1,900. However, since the question asks only for the deductions resulting from these specific facts, the correct answer is D) $1,300 ($500 deduction for the 2019 claim paid in January 2020 and $800 deduction for the office supplies paid in January 2020).