Question

Joe’s Cross Fit, an accrual-method taxpayer, provides personal training services. On October 30, 2019, Barbie pays Joe’s Cross Fit $2,400 cash for 24 months of personal training services ($100/month). Barbie’s training sessions beginning on November 1, 2019. For book purposes, Joe's Cross Fit will recognize $200 in income in 2019, $1,200 in 2020, and $1,000 in 2021. For tax purposes, how much of the $2,400 must Joe’s Cross Fit include in gross income in 2019 if Joe’s elects to defer prepaid income to the maximum extent possible?

For tax purposes, how much of the $2,400 must Joe’s Cross Fit include in gross income in 2020?

For tax purposes, how much of the $2,400 must Joe’s Cross Fit include in gross income in 2021?

Answer 1

As per IRS (Internal Revenue Service), Prepaid Income is generally is generally included in the year of receipt.However, if the taxpayer uses "Accrual Method" of accounting, he can defer Prepaid Income he received for services to be performed before the end of the next tax year.

That is, the deferral period is limited to just one year after the year of the original advance payment no matter how long it takes the taxpayer to complete the contract or how many years the contract runs to complete the service.

Here, Joe's Cross Fit, an acrrual method taxpayer received payment in 2019. So he can defer the payment only upto 2020.

Thus, for Tax Purpose, $200 is to be included in Gross Income in 2019, and the Balance $2200 in 2020. Nothing will be deferred upto 2021 for Tax Purpose.