Question

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year-end but prior to filing his tax return. Which of the following is a true statement?

a. If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year.
b. The taxes are a payment liability.
c. The taxes would not be deductible if Joe's business was on the cash method.
d. Unless Joe makes an election, the taxes are not deductible this year.
e. All of the choices are true.

Answer 1

Jeo (Self-employed Electrician)

The true statement is:

c. The taxes would not be deductible if Joe's business was on the cash method.

Step-by-step explanation:

Since Joe did not pay the property taxes this year, it will not be deductible if he were on the cash method. But the property taxes of $4,500 will be deductible because Joe operates on the accrual method. The difference between the cash and accrual methods is that using the cash method, Joe's business expenses are recognized when they are paid. But with an accrual method, Joe's business expenses are recognized when incurred and not when paid is made.