[Texan_Stuck_In_OK]

Why on earth do you include prepaid rent in income if you are an accrual basis taxpayer? Is this just one of those things I have to remember because it doesn’t make any logical sense?

MCQ:

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, 2016. On January 2, 2014, Mott paid $30,000 as consideration for cancelling the lease. On November 1, 2014, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the two months of November and December and an additional $5,000 for the last month’s rent. What amount of rental income should Nare report in its 2014 income tax return?

Answer: $45,000

To go a step further, if a landlord received a refundable deposit, would that be included in income as well, then as an expense when returned?

Tax doesn’t make any sense!!

A 88, B 76, F 84, R 76 Passed 2014

Licensed in OK

[Anonymous]

Hey Texan,

Special rules regarding methods of accounting

a. Rents and royalties received in advance are included in gross income under cash and accrual; security deposit included in income if the security deposit is nonrefundable. In your example, if the landlord received a refundable deposit, then that would NOT be included in income. Hope this helps!

Britt

[Texan_Stuck_In_OK]

Helps a bunch, thanks!!

A 88, B 76, F 84, R 76 Passed 2014

Licensed in OK

[Author]

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