Question

In December 2014, Mary collected the December 2014 and January 2015 rent from a tenant. Mary is a cash basis taxpayer. Should the amount collected in December 2014 for the 2015 rent be included in her 2015 gross income?

1) Yes
2) No

Answer 1

As a cash basis taxpayer, Mary must report the rent collected in December 2014 for January 2015 in her 2014 gross income, because cash basis accounting requires income to be reported when it is actually received.

Step-by-step explanation:

If Mary is a cash basis taxpayer, she is required to report income in the year she actually receives it, regardless of the period the income applies to. Consequently, rent collected in December 2014 for January 2015 should be included in her 2014 gross income, not 2015. The prepayment of rent, even though for January 2015, is treated as income upon receipt for cash basis accounting.

No, the amount collected in December 2014 for the 2015 rent should not be included in Mary's 2015 gross income as a cash basis taxpayer. Cash basis taxpayers recognize income when it is actually received, not when it is earned or billed. Therefore, Mary should only include the rent collected in December 2014 in her 2014 gross income and report the rent collected in January 2015 in her 2015 gross income.