Question

Why are Warranty Expenses deducted for tax purposes?

Answer 1

Warranty expenses are just normal expenses which are well due. An event which leads to liability in respect of warranty for products claimed by customer is recorded as expense. Compensation for a client may be in form of new product components, parts etc.

Another interesting term is Provision for Warranty Expenses which is nothing but accruing the liability at year end to present a true and fair view of financial statements. Since these are contingent liabilities at the year end, these are not deductible for tax purposes.

When a Taxpayer accrues any sort of warranty expense liability for accounting purpose, It is duty of Tax practitioners to gather all the material facts from the client to determine its deductibility. This includes reviewing the warranty agreement and inquiring whether any customers have actually filed warranty claims by year end.