Question

Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cash-method taxpayer and (2) an accrual-method taxpayer. a.$2,200 deposit from the Ladies’ Club, which wants to lease a trailer. The club will receive the entire deposit back when the trailer is returned undamaged.income under cash method?income under accural method? b. $1,460 from the Ladies’ Club for leasing the trailer from December of this year through March of next year ($365 per month).income under cash method?income under accural method?c. $340 lease payment received from the Men’s Club this year for renting Jeremy’s trailer last year. Jeremy billed the club last year but recently he determined that the Men’s Club would never pay him, so he was surprised when he received the check.income under cash method?income under accural method?

Answer 1

a) $0 income under both cash method and accrual method. A deposit is not taxable income unless it can beapplied toward rent.

b) $1,460 of income under both the cash method and the accrual method (advance payments of rent andinterest are always taxable when received).

c) $340 of income under the cash method.

Under the accrual basis, the income would have been recognized in the prior year. The write-off of the apparent bad debt this year would be offset by the subsequent recovery. Hence, no change in taxable income.