Question

Due to a shortage of cash, East Coast Entertainment Company, an accrual basis taxpayer, could not pay its November 2018 utility bill on time. In February of 2019, East Coast Entertainment pays the utility bill.

a)East Coast can deduct the expense on either its 2018 or 2019 tax return.
b)East Coast cannot deduct the utility expense in 2018 because it is paid in 2019.
c)NEITHER

Answer 1

Under the accrual basis accounting, East Coast Entertainment Company can deduct the utility expense in 2018, the year it was incurred, despite paying it in 2019.

Step-by-step explanation:

The subject of this question is related to the principles of accrual accounting and tax deductions. The East Coast Entertainment Company, which uses accrual basis accounting, incurred a utility expense in November 2018 but only paid it in February 2019.

Under accrual accounting and the Internal Revenue Service (IRS) regulations, businesses can claim a deduction in the year the expense was incurred, not necessarily the year it was paid. Therefore, the company can deduct the utility expense on its 2018 tax return, even though the payment was made in 2019.