Question

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2020, amounted to $1 million. For the year ended December 31, 2020, Ral’s book income, before federal income tax, was $300,000. Included in the computation of this $300,000 was the following: On 12/1/20, Ral received prepaid rent of $27,000 from a tenant for a 3-year lease commencing 1/1/21 to cover rents for the years 2021, 2022, and 2023. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended 12/31/20. What amount should Ral include in its 2020 taxable income for rent revenue?

Answer 1

Answer: $27,000

Explanation:

Even though for GAAP reasons, revenue is to be recognized only when earned as per the Accrual principle of accounting, this is not so for the calculation of taxable income.

Taxable income is to be calculated on cash basis which means that taxes are to be paid on revenue when the revenue is received in cash and not when it is earned.

As Ral Corp. received the money in 2020, they are to include the entire amount of $27,000 in their 2020 taxable income for rent revenue.