Generally, deductions for additions to reserves for estimated future costs (e.g., an allowance for estimated warranty costs) are not allowed for Federal income tax purposes because allowing the deduction would:
A) Result in a mismatching of revenues and expenses.
B) Violate established public policy.
C) Violate the all events test and economic performance requirement.
D) Violate the tax benefit rule.
E) None of the above.

Question

Quizplus · Accepted Answer

Deductions are generally not allowed for estimated future costs because they do not satisfy the all events test and economic performance requirement. This means that the liability must be fixed and the cost must be incurred before it can be deducted for tax purposes. Allowing deductions for estimated future costs would result in a mismatching of revenues and expenses, which violates the accrual basis of accounting. The tax benefit rule (D) applies when a deduction is taken in one year and income is recognized in a later year, requiring the income to be included in the later year to prevent double taxation. Violating established public policy (B) is not a reason for disallowing a deduction.

Generally, Deductions for Additions to Reserves for Estimated Future Costs