Color,Inc. ,is an accrual basis taxpayer.In December 2016,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2017.Also,in December 2016,the company received a bill of $800 for office supplies that had been purchased and used in November 2016.The bill was not paid until January 2017.In January 2017,the company received a claim for $600 for defective merchandise purchased in 2016.Color paid the customer the $600 in February 2016.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2016 as a result of the above are:
A)$500.
B)$600.
C)$800.
D)$1,300.
E)$1,900.

Question

Quizplus · Accepted Answer

Under the recurring item exception to economic performance, expenses accrued by the end of the tax year can be deducted even if payment is not made until the following year. Therefore, Color can deduct the $500 claim and the $800 bill in 2016. The $600 claim for defective merchandise purchased in 2016, however, does not qualify for the recurring item exception because it is not a recurring item. Therefore, it cannot be deducted until paid in February 2017. Thus, the total deductions for 2016 would be $1,300 ($500 + $800).

Color,Inc ,Is an Accrual Basis Taxpayer