Bob Operates a Clothing Business Using the Accrual Method Over

question 39

Essay

Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cash-basis calendar-year taxpayer, and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31 ^st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

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Definitions:

Explicit Costs

Directly incurred expenses in the operation of a business, such as wages, rent, and materials.

Entrepreneurial Talent

The unique set of skills, knowledge, and attitudes possessed by individuals that enable them to create, innovate, and manage businesses effectively.

Production Costs

The total expenses incurred in the manufacturing or production of goods, including labor, materials, and overhead.

Opportunity Cost

The amount of other products that must be forgone or sacrificed to produce a unit of a product.