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XYZ Corp., an accrual-method taxpayer, owns a rental building. Mr. King, an individual, entered into a...

XYZ Corp., an accrual-method taxpayer, owns a rental building. Mr. King, an individual, entered into a two-year lease to rent the building from XYZ Corp. at a rate of $1,000/month. The lease starts on December 1, 2019 and runs through Nov. 30, 2021. On December 1, 2019, Mr. King prepaid his rent for the entire lease ($24,000).

For book purposes, XYZ Corp. will not recognize the rental revenue until it is earned ($1,000 in 2019, $12,000 in 2020 and $11,000 in 2021).

For tax purposes, how much of the $24,000 must XYZ Corp. include in gross income for 2019?

Same facts as previous question.

For tax purposes, how much of the $24,000 must XYZ Corp. include in gross income for 2020?

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Answer #1

XYZ Corp is an accrual method taxpayer. Moreover IRS also allows business to report incomes and expenses on accrual basis. Therefore, XYZ Corp's gross income for the year 2019 shall be $12,000 (an amount equal to the revenue recognized in the books on accrual basis).

For tax purpose, XYZ Corp must include $11,000 in gross income for 2020 being the revenue attributable to the year.

Note: It is assumed that there is no expense pertaining to the lease income.

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