1-Firm B uses the calendar taxable year and the cash method of accounting. On De
ID: 2419787 • Letter: 1
Question
1-Firm B uses the calendar taxable year and the cash method of accounting. On December 31, 20x6, Firm B made certain cash payments. To what extent can it deduct the payment in 20x6? (Please note: payments for assets to be consumed in the following year are fully deductible in the year of payment if the expenditure results in a benefit with a duration of 12 months or less and is consumed by the end of the following year.) a) $3,000 compensation to a consultant who spent three weeks in January 20x7 analyzing B’s internal control system. b) $500,000 to purchase a new piece of manufacturing equipment. The equipment was delivered on January 8, 20x7 and has a useful life of 5 years. c) $16,900 property tax to the local government for the first six months of 20x7. d) $50,000 for a two-year lease beginning on February 1, 20x7. e) $23,700 of inventory items held for sale to customers.
Explanation / Answer
Since the company follows the Cash based Accounting system – Cash Payment made for a Revenue Expenditure is allowed for tax purpose in the year of payment Since the benefit from the expenditure was been accruing over the 5 years, it will be allowed in 5 equal installments in 5 Years period. Since the taxes paid it will be allowed in 2006. Since it was relating to capital asset and also the benefit form this will expire by following year. Two year Lease payment will be allowed (The benefit is going to be consumed in the following year it will be allowed in the year of payment 2006. As per the co policy assets to be consumed in the following year are fully deductible in the year of payment if the expenditure results in a benefit with duration of 12 months or less. In such case assuming the inventory is consuming in full by next following year, it was allowed in year of payment 2006.
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