All Theses, Dissertations, and Capstone Projects
An Analysis of the Rules for Determining the Taxable Year of Deduction for Expenses Incurred by Accrual-Basis Corporations
Year of Award
Master of Science in Taxation (MST)
College of Business & Professional Studies
liability, taxpayer, claims
Determining when a deduction should be claimed on an accrual-basis corporate taxpayer's income tax return can be difficult to ascertain, but the decision made by the taxpayer has important tax ramifications.
According to Section 461(h), accrual-basis taxpayers may not take expense items into account until all three of the following requirements are met:
1. All events have occurred that establish the fact of the liability.
2. The amount of the liability can be determined with reasonable accuracy.
3. Economic performance has occurred with respect to the liability.
The event that establishes the fact that the liability is fixed and certain is crucial. Generally, accrued expenses contingent on the occurrence of an event after the end of the taxable year are not fixed and certain until the event transpires.
The amount of the liability must be determinable based on facts and data that are knowable at year end. However, the amount of the liability need not be known with absolute certainty.
Section 461(f) provides that a deduction is not allowed in the year where the taxpayer contests its liability. However, a taxpayer can currently deduct a contested expense if it makes an appropriate transfer of funds in satisfaction of the contested liability. The proposed economic performance regulations attempts to clarify when economic performance is deemed to occur with respect to the taxpayer's underlying liability, and bring a time value of money factor into the determination of the taxable year of deduction.
The proposed economic performance regulations, including the important recurring item exception, are explored and the author points out questions that still remain unanswered.
Practical applications of the tax rules governing the timing of deductions are demonstrated by the analysis of various accrued expenses to provide guidance for determining the taxable year of deduction.
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Klocke, James H., "An Analysis of the Rules for Determining the Taxable Year of Deduction for Expenses Incurred by Accrual-Basis Corporations" (1991). All Theses, Dissertations, and Capstone Projects. 403.
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