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 economic performance requirement.
D)Violate the tax benefit rule.
E)None of the above.

Question

Quizplus · Accepted Answer

The economic performance requirement states that a deduction cannot be taken until all events necessary to establish the liability have occurred and the liability can be determined with reasonable accuracy. For reserves for estimated future costs, the liability has not yet been incurred, and therefore, the deduction cannot be taken until the future cost is actually incurred and paid for. Allowing the deduction would violate the economic performance requirement. Reserves for estimated future costs do not violate public policy, and the tax benefit rule and matching principle are not relevant to this issue.

Generally, Deductions for Additions to Reserves for Estimated Future Costs