Question

In December 2023, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for the 2024 calendar year. How much of the premiums can Nell, Inc., deduct in 2023? $_______.

a) $0
b) $6,000
c) $12,000
d) $18,000

Answer 1

Nell, Inc., an accrual basis taxpayer, cannot deduct the $12,000 insurance premium paid for 2024 in the year 2023, as it needs to be matched with the period it covers. The correct option is c.

Step-by-step explanation:

In December 2023, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for the 2024 calendar year.

Under the accrual basis of accounting, expenses are matched to the periods in which they are incurred, not necessarily when they are paid. Hence, the insurance premium paid by Nell, Inc. would be deducted in the corresponding period for which the insurance applies.

Since the premium is for the next year (2024), the amount of the premiums Nell, Inc. can deduct in 2023 is $0. The correct option is c.