Question

In December 2019, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the spring semester of 2020. However, she did not use the funds to pay the tuition until January 2020. Emily can exclude the $2,500 from her gross income in 2019.

A. True
B. False

Answer 1

The statement is false because on a cash basis of accounting, the $2,500 scholarship should be included in Emily's gross income for the year it was received, which is 2019.

Step-by-step explanation:

The correct answer is B. False. According to the principles of the cash basis of accounting and taxation, income is recognized when it is received, not when it is used. Therefore, the $2,500 cash scholarship received by Emily in December 2019 should be included in her gross income for the year 2019, even though she did not use the funds to pay for tuition until January 2020.

Scholarships are generally tax-free if they are used for qualified education expenses such as tuition, fees, and required materials. However, the timing of the receipt of the scholarship and the payment of these expenses matter for a cash basis taxpayer like Emily. Since she received the money in 2019, it should be reported in her 2019 tax year, irrespective of when she used it for her educational expenses.