Phoenix, a calendar year taxpayer, sells heavy equipment used in the construction industry. Sales of each piece of equipment comes with a 3 year warranty that obligates Z to make any reasonable repairs to the equipment.
Phoenix' contracts provide that customers take title to the equipment when received at the customer's designated delivery spot. Phoenix shipped equipment with a value of $12 million during 2015. Customers took delivery of $10 million of the equipment in 2015; the remaining $2 million of equipment was delivered in January 2016. Phoenix invoices provide that payment is due within 30 days of the receipt of the equipment. With respect to 2015 shipments, Phoenix received $8 million during 2015, $1 million in January 2016, and $3 million in March 2016.
For book purposes, Phoenix estimated (based on prior experience) that it will incur $500,000 of repair expenses related to the 2015 shipments and recorded a liability at December 31, 2015 for the anticipated repair expense. Phoenix did not incur any repair expenses in 2015 relative to the 2015 shipments but did incur $120,000 of expenses in 2016 - $100,000 in July 2016 and $20,000 in October 2016.
1. Assuming Phoenix is an accrual basis taxpayer, how much sales revenue should Phoenix recognize for tax purposes in 2015? Explain your answer.
2. Same 1., above, but assume Phoenix is a cash basis taxpayer.
3. Assuming Phoenix is an accrual basis taxpayer, how much of the repair expense related to 2015 shipments can Phoenix recognize as a deduction for tax purposes in 2015? 2016? Explain your answer.
4. Same as 3., above, but assume Phoenix uses the recurring item exception for repair expense.