Question

How do the all events and economic performance requirement apply to the

following transactions by an accrual basis taxpayer?

a. The company guarantees its products for six months. At the end of 2018, customers

had made valid claims for $600,000 that were not paid until 2019. Also,

the company estimates that another $400,000 in claims from 2018 sales will be

filed and paid in 2019.

b. The accrual basis taxpayer reported $200,000 in corporate taxable income for

2018. The state income tax rate was 6%. The corporation paid $7,000 in estimated

state income taxes in 2018 and paid $2,000 on 2017 state income taxes

when it filed its 2017 state income tax return in March 2018. The company filed

its 2018 state income tax return in March 2019 and paid the remaining $5,000

of its 2018 state income tax liability.

c. An employee was involved in an accident while making a sales call. The company

paid the injured victim $15 ,000 in 2018 and agreed to pay the victim

S 15,000 a year for the next nine years.

Answer 1

Part A

The all-events test is satisfied when the customer makes a claim. The claim obligates the company to pay the customer. Economic performance is not satisfied until the customer is paid. Under the recurring item exception, however, the payments of $600,000 made in 2019 on the claims filed in 2018 can be deducted in 2018. The estimated claims of $400,000 that were based on 2018 sales, but are expected to be filed in 2019, are not deductible in 2018 because the all-events test has not been satisfied.

Part B

Generally, the economic performance requirement is not satisfied until the taxes are paid. However, under the recurring item exception, the company can accrue and deduct the $12,000 ($7,000 + $5,000) for 2018. The 2017 taxes of $2,000 paid in 2018 should be deducted in 2017 under the recurring item exception.

Part C

The damage is a liability for which economic performance requires payment. The recurring item exception does not apply to such items and, therefore, the 2018 deduction is limited to the amount paid of $15,000. The remaining liability of $$135,000 ($15,000 x 9) can be deducted as payments are made.