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?

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Quizplus · Accepted Answer

On the accrual method, expenses are deducted for the period in which they are incurred, not when they are paid. Since the rent and insurance cover the next 12 months, Brad can only deduct the portion of the expenses that relate to the current tax year. Since it is July 1, he can only deduct half of the rent expense ($48,000/2 = $24,000) and the full amount of the insurance expense ($18,000). Therefore, Brad's deduction for the rent and insurance is $24,000 + $18,000 = $42,000.

Brad Operates a Storage Business on the Accrual Method