Question

Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $720 per month, payable on the first of the next month, and the tenant must make a $720 security deposit that is refunded at the end of the lease. Under lease 2, the building rents for $7,920 per year, payable at the time the lease is signed, but no security deposit is required. Under lease 3, the building rents for $720 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,440 that is to be applied toward the rent for the last two months of the lease.

Required:
a. What amounts are included in Ralphâs gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease?
b. What amounts are included in Ralphâs gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?
c. What amounts are included in Ralphâs gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease?

Answer 1

a. The amounts that are included in Ralph's gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease

= $8,640

b. The amounts that are included in Ralph's gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease:

= $7,920

c. The amounts that are included in Ralph's gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease:

= $10,080

Step-by-step explanation:

a) Data and Calculations:

Leases: Lease Payments Security Remarks

Deposit

Lease 1 Monthly rent = $720 $720 Refundable at the lease end

Lease 2 Yearly rent = $7,920 None None

Lease 3 Monthly rent = $720 $1,440 Non-refundable; last months' rent

1) The amounts that are included in Ralph's gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease

= $720 * 12 = $8,640

2) The amounts that are included in Ralph's gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease:

= $7,920

3) The amounts that are included in Ralph's gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease:

= ($720 * 12) + $1,440

= $8,640 + $1,440

= $10,080

b) Since Ralph is a cash-method taxpayer, the amounts of lease rents that are included in his gross income equal the total amounts received in the calendar-year.