ExpertHard1 markMultiple Choice
CPA · Question 47 · Area IV: Individual Taxation
A taxpayer is a cash-basis sole proprietor. In Year 1, the taxpayer performed services for a client and sent a bill for $5,000. In Year 2, the client disputed the bill and paid only $2,000. The taxpayer accepted this as full payment. What is the bad debt deduction for the taxpayer in Year 2?
A taxpayer is a cash-basis sole proprietor. In Year 1, the taxpayer performed services for a client and sent a bill for $5,000. In Year 2, the client disputed the bill and paid only $2,000. The taxpayer accepted this as full payment. What is the bad debt deduction for the taxpayer in Year 2?
Answer options:
A.
$0
B.
$3,000
C.
$5,000
D.
$2,000
How to approach this question
Cash Basis Rule: No Income Recognized = No Bad Debt Deduction.
Full Answer
A.$0✓ Correct
A cash-basis taxpayer reports income only when cash is received. Since the $5,000 was never included in income, the taxpayer has no tax basis in the receivable and thus cannot claim a bad debt deduction for the uncollected amount.
Common mistakes
Applying accrual basis rules to a cash basis taxpayer.
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