Prepaid expenses and tax deductions for a cash basis taxpayer
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Pamello, Inc, an engineering consulting firm, uses the cash method of accounting. Compute the amount of Pamello's current year deductions for the five transactions.
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Solution Summary
The solution explains in detail how the five transactions would be handled by the cash-basis taxpayer, Pamello. All five parts of the problem are possible exceptions to the cash-basis reporting rules.
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Generally speaking, a cash-basis entity would have no prepaid expenses or accounts payable on its books, but there are a few exceptions.
a. A true refundable deposit to be repaid in more than one year is a non-current asset. It wouldn't be a prepaid because it isn't a current asset. Some might argue this position, but it appears to be a true security ...
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