Which test must be passed for an accrual method taxpayer to deduct an expense currently?

For an accrual method taxpayer to deduct an expense currently, the Economic Performance Test must be passed. This test requires that the economic performance, which generally corresponds to the service or property being provided, must occur before the expense can be recognized for tax purposes.

This principle is based on the accounting standard that dictates expenses must be matched to the revenues they help generate, ensuring that deductions reflect actual economic activity. For example, if a business incurs an expense in a year but the service related to that expense is not performed until the following year, the business cannot deduct that expense until the economic performance actually occurs.

The underlying rationale of this test is to ensure that taxpayers do not take deductions for expenses that they haven't yet incurred in an economic sense, thus maintaining a level of honesty and consistency in financial reporting and tax liability.