Question

Home Office, Inc., an accrual basis taxpayer, leases a copying machine to a new customer on December 27, Year 1. The machine was to rent for $500 per month for a period of 36 months beginning January 1, Year 2. The customer was required to prepay 6 months rent at the time the lease was signed on December 27, Year 1. The customer was also required to pay a $2,000 damage deposit at the time the lease was signed. The damage deposit will be returned to the taxpayer at the end of the lease if no damage occurs. Determine the amount of gross income

Home Office recognizes in Year 1.

Answer 1

As we need to determine of gross income for year 1 i.e. income between after December 27 and before January 1st. So as per condition the customer has to pay six months advance rent which is ($500*6) $3000 and also $2000 as deposit against damage. No matter if it refundable as we are receiving money in 1st year so it will be considered as income and refundable on last year. Thus, Total $ 5000 is the gross income in 1st year. Hence, the customer should pay this amount immediately on or before signing lease agreement.

Amount Year 1 3000 Six months rent in advance 2000 Deposit for damages 5000 Total income for year 1 Total Income