Nov 6, 20201 min read

Cash-basis firms must deduct expenses in the right year.

Updated: Nov 17, 2020

Case 1: Attorney William was on a cash basis. For one client he had substantial travel and out-of-pocket expenses, for which he was paid a per diem. Under their agreement, William would be paid only when the client was able to. One year, the per diems did not cover all expenses, so C deducted the expenses in the following year—when he received the related per diems—but the IRS denied the deductions.

Held: For the IRS. §461(a), General rule for taxable year of deduction, requires that cash-basis taxpayers deduct expenses in the year the expenses take place. William apparently tried to match the reimbursements to the expenses. But the tax code does not permit deducting expenses in a year after they were incurred, so the deductions were denied for the later years. William might be able to file amended tax returns for prior years to deduct the expenses in the years incurred. This might result in net operating loss carryovers deductible in later years

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