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On January 1, 2018, cash basis taxpayer pays $6,000 for an insurance policy which covers his...

On January 1, 2018, cash basis taxpayer pays $6,000 for an insurance policy which covers his business property for the period beginning April 1, 2018, and ending on March 31, 2020. How much, if any, of the $6,000 can the taxpayer deduct in 2018 (the year of payment)?

a.

nothing because the expense is a prepayment
b.

The entire $6,000
c.

$3,000
d.

$2,250
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Homework Answers

Answer #1

Ans:

Insurance paid $6,000 in January 2018 for the period cover April 1 2018 to March 31 2020. The expenses should be deducted based on the proportion of expense covered for the releted financial year.

For the year April 2018 to December 2019. Insurance expense related to this period will be allowed to be deducted for tax purposes.

So allowable expense is :

Policy Coverage : 24 Months.

Related to Financial year 2018 : 9 Months

Allowable expesnes : 9/24 * $6,000 = $2,250

Correct answer is option D.

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