Color,Inc. ,is an accrual basis taxpayer.In December 2011,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2012.Also,in December 2011,the company received a bill of $800 for office supplies that had been purchased and used in November 2011.The bill was not paid until January 2012.In January 2012,the company received a claim for $600 for defective merchandise purchased in 2011.Color paid the customer the $600 in February 2012.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2011 as a result of the above are:

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Under the recurring item exception, Color, Inc. can deduct expenses in the year they are incurred if they are recurring and meet certain criteria. The $500 claim for defective merchandise and the $800 bill for office supplies are deductible in 2011 because they were incurred in that year, even though they were paid in 2012. The $600 claim for defective merchandise received in January 2012 is not deductible in 2011 because it was not incurred in that year. Therefore, the total deduction for 2011 is $500 + $800 = $1,300.

Color,Inc ,Is an Accrual Basis Taxpayer