In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18-month lease for $36,000. The lease commences on October 1, 2019. How much of the $36,000 payment can she deduct in 2019 and 2020?
a.If Mella is an accrual basis taxpayer? b.If Mella is a cash basis taxpayer?
What will be an ideal response?
| a.?? | As an accrual basis taxpayer, Mella can deduct the 2019 amount of the rent expenses incurred in 2019 of $6,000 ($2,000 × 3 months) and the $24,000 ($2,000 × 12 months) incurred in 2020. |
| b.??? | Since Mella is a cash basis taxpayer, she can deduct the entire $36,000 prepayment in 2019 if she can satisfy the 12-month rule. However, since the rental period of 18 months extends beyond the end of 2020, she fails the requirement for the one-year rule. Consequently, she can deduct only $6,000 in 2019 and $24,000 in 2020. |
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