Question

In December 2014, Mary collected the December 2014 and January 2015 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2014 for the 2015 rent should be included in her 2015 gross income? Which of the following statements accurately reflects the tax treatment for Mary, a cash basis taxpayer, who collected rent in December 2014 for January 2015?

A) Yes, the amount collected in December 2014 should be included in her 2015 gross income.
B) No, since Mary is a cash basis taxpayer, the amount collected in December 2014 should be included in her 2014 gross income.
C) It depends on Mary's accounting method; if she chooses accrual basis, then it should be included in 2015 gross income.
D) No, the rent collected in December 2014 for January 2015 is not considered taxable income until it is received in 2015.

Answer 1

The correct answer is B) No, since Mary is a cash basis taxpayer, the amount collected in December 2014 should be included in her 2014 gross income.

Step-by-step explanation:

No, since Mary is a cash basis taxpayer, the amount collected in December 2014 should be included in her 2014 gross income.

As a cash basis taxpayer, Mary recognizes income when it is received, rather than when it is earned. Therefore, she should include the rent collected in December 2014 for January 2015 in her 2014 gross income. Even though the rent is for the following year, it is considered income for the year in which it was received.

In contrast, accrual basis taxpayers recognize income when it is earned, regardless of when it is received. If Mary was an accrual basis taxpayer, she would include the rent in her 2015 gross income, as it would be considered income for the year in which it was earned.