ExpertMedium1 markMultiple Choice
CPA · Question 50 · Area III: Entity Tax Planning
A C Corporation expects a significant increase in state income tax rates in Year 2. It uses the accrual method. It has a state income tax liability for Year 1 that is paid in Year 2. To maximize tax savings, what should the corporation do regarding the timing of the deduction?
A C Corporation expects a significant increase in state income tax rates in Year 2. It uses the accrual method. It has a state income tax liability for Year 1 that is paid in Year 2. To maximize tax savings, what should the corporation do regarding the timing of the deduction?
Answer options:
A.
It cannot choose; it must deduct in Year 1 (accrual year).
B.
Elect to deduct in Year 2 when paid.
C.
Switch to cash method for one year.
D.
Defer the liability accrual by disputing the tax.
How to approach this question
Identify Accounting Method (Accrual). Rule: Deduct when liability is fixed and determinable (Year 1).
Full Answer
A.It cannot choose; it must deduct in Year 1 (accrual year).✓ Correct
A
IRC §461. Under the accrual method, state income taxes are deductible in the year the liability is incurred (Year 1), regardless of when paid. Planning flexibility is limited here.
Common mistakes
Thinking accrual taxpayers can deduct when paid.
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