Color, Inc., is an accrual basis taxpayer. In December 2018, the company received from a customer a $500 claim for defective merchandise. Color paid the customer in January 2019. Also, in December 2018, the company received a bill of $800 for office supplies that had been purchased and used in November 2018. The bill was not paid until January 2019. In January 2019, the company received a claim for $600 for defective merchandise purchased in 2018. Color paid the customer the $600 in February 2018. Assuming Color uses the recurring item exception to economic performance, the company's deductions for 2018 as a result of the above are:
A) $500.
B) $600.
C) $800.
D) $1,300.
E) $1,900.

Question

Quizplus · Accepted Answer

Under the recurring item exception, a taxpayer can deduct expenses in the year incurred even if economic performance has not occurred, provided that the expense is recurring in nature and the taxpayer consistently uses this method.

In this case, Color can deduct the $500 claim for defective merchandise received in December 2018 because it was paid in January 2019. Likewise, the company can deduct the $800 office supplies bill received in December 2018 because it was not paid until January 2019.

However, the $600 claim for defective merchandise received in January 2019 cannot be deducted in 2018 since it was not incurred until the following year.

Therefore, the total deductions for 2018 are $500 + $800 = $1,300.