Tax Court Upholds Disallowance of Accrued Expenses in Garibyan Case
Case Summary
In the case Garibyan, TC Memo 2025-106, the Tax Court addressed the issue of whether a small business owner using the accrual method of accounting could deduct certain accrued expenses. The court upheld the disallowance of these expenses, emphasizing that choosing the accrual method does not permit taxpayers to manipulate their financial records improperly. The ruling reinforces the principle that expenses must be properly substantiated and meet the criteria for deduction under tax law, regardless of the accounting method used. This case highlights the distinction between the cash and accrual methods of accounting, noting that while the cash method is often preferred for its simplicity, the accrual method requires strict adherence to recognized accounting principles. The decision serves as a caution to business owners that the accrual method does not provide latitude to artificially inflate deductions or distort financial results.
Key Issues
- • Accrual method of accounting
- • Deductibility of accrued expenses
- • Tax Court standards for expense substantiation
- • Differences between cash and accrual accounting methods
- • Tax compliance and avoidance of improper deductions
Case Timeline
1 eventTax Court OKs Disallowance of Accrued Expenses
Usually, a small business owner will choose to use the cash method of accounting for simplified recordkeeping reasons. However, sometimes business owners may prefer the accrual method of reporting. As shown in a new case, Garibyan, TC Memo 2025-106, 10/9/25, this doesn’t give you free rein to “cook the books.” First, let’s quickly review the basics. There are two basic methods, as well as several hybrids, of accounting for income and expenses.