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Can Aubry deduct the expenditure for supplies for 2008?

Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2008 by buying $30,000 worth of supplies on December 24th, 2008. The supplies will be used up in 2009.

a. Can Aubry deduct the expenditure for 2008?

b. Would your answer in part (a) change if Aubry bought the supplies because the seller was going out of business and offered a significant discount on the price?

Solution Preview

a. Technically speaking, a cash basis taxpayer can deduct prepaid expenses purchased, received and paid for prior to the end of the year.
b. It wouldn't matter what kind of purchase or deal Aubry got provided he paid for them and took delivery by year end.

There could be certain circumstances where such a purchase might be questioned by taxing authorities:

1. the purchase must not be inventory for resale because even a cash basis taxpayer cannot deduct purchases of inventory.

2. the items purchased must be used up soon; in other words, current assets; however the ...

Solution Summary

The 383 word solution explains the conditions underwhich the taxpayer might deduct the purchase of supplies, but also gives definite answers after various explanations of the impact of the transaction. Examples are included.

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