A calendar year,cash basis corporation began business on October 1,2012 and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on October 1,2012 and purchased a 12-month liability insurance policy.The cash basis corporation can deduct $2,400 as insurance expense for its first tax year ending on December 31,2012,but the accrual basis taxpayer can deduct only $300 (3/12 ´ $1,200).

Question

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The cash basis corporation can only deduct the portion of the insurance that applies to the current tax year, which is $300 (3/24 of $2,400), not the entire $2,400. The accrual basis taxpayer can deduct $300 because it matches the expense to the period it covers.

A Calendar Year,cash Basis Corporation Began Business on October 1,2012