Question

The amount of the addition to the reserve for bad debts foran accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.

true
false

Answer 1

The deduction for the addition to the reserve for bad debts is indeed permitted for accrual-method taxpayers but not for cash-method taxpayers, reflecting the difference in how income and expenses are recognized under each accounting method.

Step-by-step explanation:

The statement that the addition to the reserve for bad debts is allowed as a deduction for accrual-method taxpayers but not for cash-method taxpayers is true. For tax purposes, accrual-based accounting recognizes income when it is earned and expenses when they are incurred, regardless of when the actual cash is received or paid.

This allows for the deduction of bad debt reserves as an estimate for accounts that are expected to be uncollectible. On the other hand, cash-based accounting recognizes income and expenses only when cash is received or paid, therefore, the reserve for bad debts cannot be deducted until the debt is written off as uncollectible.