Brad operates a storage business on the accrual method. On July 1, Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance cover the next 12 months. What is Brad's deduction for the rent and insurance?
A)$48,000 for the rent and $18,000 for the insurance
B)$24,000 for the rent and $18,000 for the insurance
C)$24,000 for the rent and $9,000 for the insurance
D)$48,000 for the rent and $9,000 for the insurance
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

On the accrual method, expenses are deducted when they are incurred, not when they are paid. In this case, Brad has prepaid the rent and insurance for the next 12 months, but he can only deduct the portion of the expenses that applies to the current tax year. Since the expenses cover 12 months and only 6 months of the current tax year have passed (July 1 to December 31), Brad can deduct 6/12 or 1/2 of the expenses. Therefore, his deduction for the rent is $48,000/2 = $24,000 and his deduction for the insurance is $18,000/2 = $9,000. The best choice is B, $24,000 for the rent and $9,000 for the insurance.

Brad Operates a Storage Business on the Accrual Method