A calendar year, cash basis corporation began business on April 1, 2016, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2016, and purchased a 24-month liability insurance policy. The accrual basis taxpayer must amortize the premiums over 24 months but the cash basis taxpayer may deduct the total premiums in 2016.

Question

Quizplus · Accepted Answer

A cash basis taxpayer can only deduct expenses when they are actually paid. Since the insurance policy covers 24 months, the cash basis taxpayer must allocate the expense over the period it covers, not deduct it all in the year of payment.

A Calendar Year, Cash Basis Corporation Began Business on April