- 3 -
Gross income $136,871
Car and truck expenses 13,847
Depreciation/sec. 179
expense deduction 1,031
Insurance 719
Office expense 5,950
Rent/lease 828
Supplies 110,775
Taxes/licenses 2,500
Total expenses 135,650
Net Profit 1,221
According to the Schedule C, the above items were reported in
accordance with the cash method of accounting. The Schedule C
further suggests that petitioner “started or acquired this
business” before 1994.
Although petitioners claimed a $110,775 deduction for
supplies in 1994, only $81,449 of that amount had been paid as of
the close of that year. The balance, $29,326, was paid in
installments made during later years.
In the notice of deficiency, respondent disallowed that
portion of the deduction for supplies that represented unpaid
expenses. Other adjustments made in the notice of deficiency are
not in dispute.
Discussion
In general, under the cash method of accounting, income is
recognized in the year of actual or constructive receipt, and
expenses are deductible in the year of actual payment. Sec.
1.446-1(c)(1)(i), Income Tax Regs. Respondent, pointing to the
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Last modified: May 25, 2011