12 Month Rule Essay

For this tax research assignment the “12-month rule” in the accrual basis of accounting is applicable to this problem. The “12-month rule” states that taxpayers are not required to capitalize an expense if it is paid or incurred to create a right or benefit that does not extend beyond the earlier of 12 months after the first date of the right or benefit or the end of the tax year following the tax year in which the expense was paid or incurred. Basically if you have paid or incurred an expense that has benefit within a 12 month period or before the end of the tax year following the tax year in which the benefit is realized you do not have to capitalize the expense and you can deduct the full amount in the current year.

2. You can find the “12-month rule” in the federal tax regulations section 1.263(a)-4(f), Internal Revenue Service, Amounts paid to acquire or create intangibles. The excerpt from the treasury regulations states the general rule that I stated earlier and a few other key points. The “12-month rule” is inapplicable to amounts that create financial interests and self-created amortizable intangibles that are described in paragraph (d)(2). It is also inapplicable to amounts that create an intangible of indefinite duration, which means it has no fixed period of time either by an agreement or by law. This excerpt also states that if a taxpayer is using an accrual basis of accounting the “12-month rule” does not affect the determination of whether a liability is …show more content…
The tax court case U.S. Freightways Corp. V. Commissioner from November 2, 1999 is a good example of another court case where the “12-month rule” applies. In this court case the commissioner concluded that Freightways should have capitalized its 1993 FLIP expenses and deducted them over the 1993 and 1994 tax years. The tax court eventually sided with the commissioner with the reason being that since Freightways is an accrual method taxpayer they were required to capitalize their FLIP