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Shanna, a calendar year and cash basis taxpayer, rents property to be used in her business from Janice. As part of the rental agreement, Shanna pays $27,000 rent on April 1, 2022, for the 12 months ending March 31, 2023. Do not round any division. a. How much is Shanna's deduction for rent expense in 2022 ? b. Assume the same facts, except that the $27,000 is for 24 months' rent ending March 31,2024 . How much is Shanna's deduction for rent expense in 2022? q

2 Answers

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Final answer:

a. Shanna's deduction for rent expense in 2022 would be $27,000. b. If the $27,000 is for 24 months' rent ending March 31, 2024, Shanna's deduction for rent expense in 2022 would be $0.

Step-by-step explanation:

a. Shanna's deduction for rent expense in 2022 would be $27,000. Since Shanna is a calendar year taxpayer, she can deduct the full amount of the prepaid rent in the year it was paid.

b. If the $27,000 is for 24 months' rent ending March 31, 2024, Shanna's deduction for rent expense in 2022 would be $0. Shanna can only deduct the portion of the prepaid rent that applies to the current tax year.

User Fanta
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3 votes

Final answer:

Shanna can deduct $27,000 as rent expense for 2022 under the 12-month rental agreement. If the payment covers 24 months, she can deduct $10,125 for the part of the rent that applies to 2022 (9 months). These amounts are based on the cash basis method of accounting where expenses are recognized when paid.

Step-by-step explanation:

The question pertains to the calculation of rent expense deduction for a taxpayer who uses the cash-based method of accounting. The cash basis method recognizes expenses when they are paid, not when they are incurred. Therefore, the amount of rent expense that Shanna can deduct will depend on the rental agreement term length and the payment date.

Part A

For part A, with the payment covering 12 months (April 1, 2022, to March 31, 2023), the rent expense deduction for 2022 would be the full amount, because she has paid for the entire 12 months within the tax year of 2022. Hence, Shanna's deduction for rent expenses in 2022 would be $27,000.

Part B

Assuming the same payment dates but now covering 24 months (April 1, 2022, to March 31, 2024), Shanna can still fully deduct the payment made in 2022. However, only the portion that relates to the 2022 tax year should technically be considered an expense for that year. The deduction for 2022 would then be the amount for 9 months (April to December 2022). Therefore, Shanna would calculate the monthly rent ($27,000 / 24 months = $1,125 per month) and then multiply this by the 9 months of rent attributable to 2022. This comes to $10,125 as Shanna's deduction for rent expenses in 2022 for part B.

User Yajiv
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