Question

In 2017, Juan entered into a contract to write a book. The publisher advanced Juan $50,000, which was to be repaid out of future royalties. If the book was not completed by the end of 2018, however, Juan would be required to repay the publisher for the advance. Juan did not complete the book in 2018, and in accordance with the agreement, he repaid the $50,000 to the publisher in 2019. Juan is a cash basis taxpayer. What are the tax consequences to Juan of the repayment under the following assumptions?

A. Juan's marginal tax rate was 15% in 2017 and 35% in 2019.

B. Juan's marginal tax rate was 35% in 2017 and 12% in 2019

Answer 1

(a) In this assumption as per cash basis Juan already had paid tax @15% i.e. $7500

In 2019 if his book gets completed and he receives full amount of consideration he should not consider the advance paid back to client by doing this he will not be liable to increased tax according to increase tax rate.

(b) In this assumption Juan has paid $17,500 as tax in 2018, which he should claim as tax credit or refund as the case may be when the advance is given back. And if he receives full consideration in 2019 after completing book he should consider it as fresh cash receipts by doing this he will be liable only to $7500 tax not $17,500 which he already paid.