Question

Mack, a self-employed taxpayer, spent $1,200 on an insurance policy that covers his business from July 1, 2019, to June 30, 2020. How much will Mack deduct in 2019 if he is a cash basis taxpayer? accrual basis?

Answer 1

Based on the information available in the question, we understand that Mack is a self employed taxpayer. The insurance policy on his business covers the period between July 1, 2019 to June 30, 2020. The amount he spent on his insurance policy is $1,200.

Under Cash basis of accounting, the revenues received or expenses made will be recorded as per the cash received or cash paid respectively. As such, since Mack has paid the insurance policy worth $1,200 during 2019 , the entire amount is expensed during 2019.

However, under Accrual basis of accounting, the revenues are recognized when they are earned while expenses that are made are matched according to the period relating to when the revenues were earned. As such, since Mack paid for a yearly policy on July 1, 2019, the amount that Mack will deduct for insurance for the year 2019 is calculated as :-

$1,200 * 6 months/12 months = $600

Hence, to summarize:-

Cash Basis taxpayer - $1,200

Accrual Basis taxpayer - $600

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