Question

Required informationThe following information applies to the questions displayed below.In January of year 0, Justin paid $7,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting.What amount of the insurance premium may Justin deduct in year 0 in each of the following alternative scenarios? (Leave no answers blank. Enter zero if applicable.)The policy covers the business property from April 1 of year 0 through March 31 of year 1.

Answer 1

Justin may deduct $5,850 of the insurance premium in Year 0 for his business property coverage from April 1 of Year 0 to March 31 of Year 1.

Step-by-step explanation:

Justin may deduct a portion of the insurance premium in Year 0 based on the length of coverage for his business property. The policy covers the property from April 1 of Year 0 through March 31 of Year 1, which means it covers a total of 12 months. Since Justin is a calendar-year taxpayer, his tax year aligns with the calendar year. Therefore, he can deduct the insurance premium for the months the policy covers in Year 0, which is nine months (January through September). To calculate the deductible amount, we can use the formula:

Deductible amount = (Total premium / Total coverage period) x Deductible coverage period

Given that Justin paid $7,800 for the insurance policy and it covers 12 months:

Deductible amount = (7800 / 12) x 9 = $5,850

Therefore, Justin may deduct $5,850 of the insurance premium in Year 0.