PART II-Short Answer. Answer the following questions on the space provided below

Question

PART II-Short Answer. Answer the following questions on the space provided below. Be sure to answer each question in its entirety and to label your answer. In order to protect against rent increases on the building in which she operates a dances signs an 12-month lease for $36,000. The lease commences on Aug $36,000 on August 1, 2013. How much of the $36,000 payment can she deduct in 2013 and 2014? a. If Mella is an accrual basis taxpayer? b. If Mella is a cash basis taxpayer? had deht last year. She also had an $8,000 long-term capital gain ynectedly collected

Explanation / Answer

a. If Mella is an accrual basis taxpayer, then, she can deduct the lease equivalent to 5 months i.e from 1Aug,2013 to 31Dec,2013 for 2013 . Thus, the total deductible amount would be $ 36000 × 5/12 = $15000

Hence, amount deductible in 2014 would be for the remaining 7 months i.e. from 1 jan 2014 to 31July,2014 .

This would amount to $36000 × 7/12 = $21000

b. If Mella is a cash basis taxpayer, then the entire $36000 lease would become the deductible in the year of payment i.e $36000 woupd be deductible in 2013 itself.

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