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 covers the next 12 months. What is Brad's deduction for the rent and insurance?

Question

Quizplus · Accepted Answer

Economic performance occurs for the rent ratably over time so only $24,000 is accrued ($2,000 per month). Insurance is a payment liability and accrues only as paid. However, since the payment spans 2 periods (6 months this year and 6 months next year), the portion benefiting the future period would typically be capitalized. In this case the duration of the contract does not exceed 12 months and the payment does not extend beyond the end of next year. So, the 12-month rule allows for the deduction of $18,000. Note that the 12-month rule can not apply to the rent until economic performance occurs and this only happens ratably.

Brad Operates a Storage Business on the Accrual Method