An exception to the economic performance test allows the deduction of year-end accruals if
I.Either the expense is not material for both tax and financial purposes or the accrual results in a better matching of revenue and expenses.
II.The taxpayer consistently treats the item as incurred in the year the all events test is met.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

An exception to the economic performance test allows the deduction of year-end accruals if
I.Either the expense is not material for both tax and financial purposes or the accrual results in a better matching of revenue and expenses.
II.The taxpayer consistently treats the item as incurred in the year the all events test is met.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Both statements are correct. The economic performance test generally requires that expenses be incurred and paid in the same year in order to be deducted. However, there is an exception to this rule if the year-end accruals are immaterial or if they result in better matching of revenue and expenses. In addition, the taxpayer must consistently treat the item as incurred in the year the all events test is met in order to qualify for this exception.

An Exception to the Economic Performance Test Allows the Deduction