Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?
What will be an ideal response?
Zero. The warranty cost is only deductible when paid, this year.
Warranties provided to the taxpayer are payment liabilities. Consequently, Colby is not allowed to deduct the $15,000 cost of the warranty last year. He will deduct it this year when the warranty is paid for.
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