[startupcfo]

See MCQ# 1048

Lake Corp., an accrual-basis calendar-year corporation, had the following Year 5 receipts:

Year 6 advanced rental payments
where the lease ends in Year 6 $125,000
Lease cancellation payment from
a 5-year lease tenant 50,000

Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its Year 5 tax return?

A.
$0

Incorrect B.
$50,000

C.
$125,000

D.
$175,000

——————————

I thought the whole idea of the accrual system is that you can only recognize income after economic performance has occurred. Since your tenant hasn’t enjoyed the use of the property in 2016 yet, shouldn’t this be an unearned revenue (asset) account as opposed to an income account?

I thought this was a core principle in IRC Sec 83.

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
AUD - XX | 09/10
FAR - XX | 12/10

[pharaoh]

I think because it is asking for income for tax return which is cash basis, so both should be included, was D the answer?

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[Anonymous]

IRS vs. GAAP. So much fun. 😐

Another piece though – unearned revenue is a liability not an asset. If you don't perform the service, you'll have to return the revenue, or at least that's the assumption in the GAAP treatment.

[startupcfo]

I flubbed that Lilla, I meant to say “liability”

Jimmy, D was the right answer, but it clearly states in the prompt that it's an ACCRUAL tax payer. There's no reason to think he was filing on the cash basis, right?

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
AUD - XX | 09/10
FAR - XX | 12/10

[Nick_P]

Correct me if I am wrong. IRC vs. GAAP is the origin of deferred tax liabilities and assets. IRC does not acknowledge the companies basis of accounting and requires a cash basis.

[Amortized and Energized]

For tax purposes you would have to report it immediately. For financial reporting purposes and according to GAAP your original line of thinking is correct.

FAR - Aug 2015 (58), Feb 2016 (81)
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BEC - May 2016 (79)
AUD - Jul 2016
REG - Aug 2016

[pharaoh]

For your books, you are accrual basis which means you are going to record it as Deferred Revenue/Advance Payments which will make it a temporary difference. “Tax” books are cash basis and will be recorded as income as cash was received.

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[Missy]

This is a specific exception. From IRS Pub 334 Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. This is true no matter what accounting method or period you use.

https://www.irs.gov/publications/p334/ch05.html

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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