Twin City Manufacturing Corporation is an accrual basis taxpayer. Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan. Twin City Manufacturing pays $100 per month per employee into the plan fund. The fund is then used to reimburse employees' medical expenses. During the current year, Twin City Manufacturing Corp. pays $12,000 into the fund and pays medical reimbursement claims of $10,600.
I.If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000.
II.If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.

Question

Twin City Manufacturing Corporation is an accrual basis taxpayer. Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan. Twin City Manufacturing pays $100 per month per employee into the plan fund. The fund is then used to reimburse employees' medical expenses. During the current year, Twin City Manufacturing Corp. pays $12,000 into the fund and pays medical reimbursement claims of $10,600.
I.If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000.
II.If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.
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Quizplus · Accepted Answer

If Twin City Manufacturing is a cash basis taxpayer, it can only deduct expenses that it actually paid during the year. Therefore, it can only deduct the $10,600 that it paid out in medical reimbursement claims. The $12,000 that it paid into the fund is not deductible until it is actually used to reimburse medical expenses.

Twin City Manufacturing Corporation Is an Accrual Basis Taxpayer