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 $12,300 in rebates and was liable for an additional $7,650 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Question

Quizplus · Accepted Answer

Big Homes can deduct the accrued rebates of $7,650 this year because they are fixed and determinable. In addition, Big Homes can also deduct the paid rebates of $12,300 this year. As an accrual-method taxpayer, Big Homes must record expenses when they are incurred and earn revenue when it is earned, regardless of when the cash is received or paid. Since Big Homes expects to continue offering rebates and plans to pay the accrued rebates before filing its tax return, the accrued expense is deductible in the current year. Finally, rebates are not against public policy and are common in many industries.

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