REG Study Group – Q1 2018 - Page 9

It's stated multiple times in the book updates I believe, but yes, according to those materials effective April 2017 the due dates will no longer be tested.
Kind of a disappointment because those would be very easy points.

I have hard time understanding this question.
Any one can explain?

This question is from Gleim test bank

Clyde operated a food distribution business. He leased a small warehouse in 2015 for $60,000 per year for a 3-year term. The lease was to start on July 1, 2015. Clyde paid the first 2 years’ rent in advance in May 2015. Clyde then began to make monthly payments of $5,000 starting on July 1, 2017, and continuing on the first of the month for the balance of 2017. What rent expense may Clyde claim in 2017?

A. $60,000
Answer (A) is correct.
Assuming that Clyde is a cash-basis taxpayer, generally, rental expenses are deductible by a cash-basis taxpayer-lessee in the tax year in which they are paid. However, the general rule does not apply to advance rental payments. Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. Clyde will be able to deduct $60,000 of rent because he can deduct the allocated portion of the $30,000 prepaid rent and the $30,000 of current rent expenses paid. Because the prepayment extends beyond the tax year following prepayment and there is no contractual obligation to prepay each year, the exception in Reg. 1.263(a)-4(f)(8) does not apply.

@ Lentil
I agree with the above except #2 is the same as FAR.
If a corp prepays rent you Debit Prepaid Rent asset, and debit cash.

The most important concept for TAX and the IRS is that the IRS will almost always access the tax when it is most likely to collect.
For the above question, the tax is accessed on the individual/entity when it receives the money, because the IRS is most likely to collect the tax if accessed as soon as the cash is in hand.

Similar to when a partnership distributes property, the transaction is not taxed as the cash is not in the hands of the person receiving the property, but as soon as they sell it, BAM, IRS says pay up. Just think of the IRS as your friendly neighborhood loan shark, they always sniff out when you have cash to pay.

@reckedracing

I have to think about what you said regarding #2. I'll follow-up when my brain recovers from the GLEIM test bank session that I just went through. I have copied some of the GLEIM REG questions from the test bank as I am doing it and they show up in Google searches as EA questions. Thanks for confirming this for me in your GLEIM books.

Is there any distinction between separately-stated items for an S corp. vs. a partnership? I just did a module in GLEIM that pointed out some differences between large partnerships (over 100 partners) and regular partnerships. I don't think the EXAM is going to test large partnerships. So, I want to be clear on S corp. vs partnerships separately-stated items in general.

Thanks.

@reckedracing

For #2, I agree with what you said after some thought. Thanks for pointing that out. I want to summarize our discussion so other people who read it at least for the purposes of REG, won't be confused.

Regulation section:

I can't deduct prepaid rent expenses that extend beyond the current year in this year's tax return. This is the same for cash basis and accrual basis taxpayers. However, as the recipient of the prepaid rent whether cash basis or accrual basis, the IRS wants me to include everything in my tax return for the year when I get it.

Do you agree with what I've said as it applies to REG?

Might be oversimplifying things, but I just think of separately stated items as pretty much anything subject to a phaseout or limitation. Saves me from having to memorize another form or mnemonic…there's way too many of them for REG. Bankruptcy alone has like 5, wtf?

I'm having a hard time remembering which assets should be depreciated mid quarter, half year, and the useful lives of assets. Is there anywhere that lays all of this out in an easy to read format?

535/670 79.8%
Halfway through Roger MCQs. ~64.25 hours to date.
12 days to go.

@Bourne
Here is the basic rundown from my course.
Real estate 27.5 Residential, 39 year commercial, both straight line with mid month convention.
3 year = Small tools, Off the shelf software
5 year = Auto, light truck, copiers, computers, printers
7 year = most other personal property, equipment, office furniture, desks
MACRS DDB 200% for 3 5 7. Half year unless more than 40% of assets are purchased in the last quarter of year, then mid quarter convention used.
My course says 3 5 7 year are the most heavily tested.

If you purchase >40% of assets in the last quarter the IRS doesn't want you to get that extra 3 months of depreciation by using the half year convention.
They always find a way to squeeze every last penny out of you.

Hope this helps you.
When in doubt, remember the IRS usually uses a SHORTER life than you would anticipate for depreciation purposes, EXCEPT for computers which are realistically outdated before 5 years. ie: A well maintained car will last longer than 5 years. A well maintained house will last longer than 27.5. You get the idea.