In 2015 Juan entered into a contract to write a book. The publisher advanced $10

Question

In 2015 Juan entered into a contract to write a book. The publisher advanced $100,000 to him, which was repaid out of future royalties. If the book was not completed by the end of 2015, however, Juan would be required to repay the publisher for the advance. Juan did not complete the book in accordance with the contract repaid the $100,000 to the publisher in 2016. Juan is a cash basis taxpayer. Assuming that you are Juan’s tax accountant and prepared to minimize his taxes—how will juan report the repayment in 2016 under the following assumptions: A) Juan’s marginal tax rate was 15% in 2015 and 35% in 2016? B) Juan’s marginal tax rate was 35% in 2015 and 15% in 2016?

Explanation / Answer

(a) In this assumption as per cash basis Juan already had paid tax @15% i.e. $15000

In 2016 if his book gets completed and he receives full amount of consderation 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 $35000 as tax in 2015, 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 2016 after completing book he should consider it as fresh cash receipts ny doing this he will be liable only to $15000 tax not $35000 which he already paid.

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