Question

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?

Answer 1

As XYZ corporation is an accrual method taxpayer,it should calculate it's income on accrual basis. According to accrual basis,only rental revenue of year 2019 will be included in gross income for 2019. However,difference in tax is timing difference i.e.,the total effect on tax will be same. If the tax in the current year is low,tax in future year will be high and vice versa.

Therefore,$1000 will be included in gross income of XYZ corporation.for 2019