ACC 331 Chapter 5 Flashcards
Business deductions
Trade and business expenses that are ordinary, necessary, and reasonable in amount
Ordinary
Normal, usually, or customary under regular business circumstances
Necessary
A profit motive behind incurring the expense
Reasonable in amount
Compared to FMV
Deduct expenses for cash method
In the year they are paid
Prepaid expenses
Apply the 12 month rule
Expenses related to issue of stock
Capitalized and deducted when the corporation is liquidated
Research and development expenses
Taxpayer has option to immediately expense, amortize, or capitalize and deduct when venture comes to an end
Deduct an expense accrual methods
Deduct the expenses when the expense meets both the all events test and economic performance test
All events test
All events have occurred to establish the taxpayers liability and the amount of the liability can be determined with reasobable accuracy
Economic performance test
Underlying activity generating the liability has occurred. When economic performance occurs depends on the activity
Economic performance for purchase of goods and services from vendors
When goods or services are relievers/prodvided to business or upon payment if taxpayer reasonably expects vendor to perform within 3.5 months of payment
Economic performance for renting or leasing property
Expense is deducted over the rental/lease period
Economic performance for provided goods or services to customers
Taxpayers deducted expense as costs are incurred
Contingent liabilities
Taxpayers cannot deduct until payments are made
