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 $13,400 in rebates and was liable for an additional $8,200 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Question

Quizplus · Accepted Answer

Big Homes, as an accrual-method taxpayer, must record expenses in the year the liability is incurred, regardless of when it is paid. The $13,400 already paid in rebates can be deducted in the current year, and the $8,200 liability for future rebates can also be deducted if the following conditions are met: the amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year. Choice A is incorrect because payment liabilities do not determine deductibility of expenses. Choice B is incorrect because being an accrual-method taxpayer does not automatically entitle Big Homes to deduct all accrued expenses. Choice D is incorrect because the liability is fixed and determinable since Big Homes knows the exact amount of the rebates it owes to buyers. Choice E is incorrect because there is no public policy disallowing rebates as a deduction.

Big Homes Corporation Is an Accrual-Method Calendar-Year Taxpayer That Manufactures