Larry and Wendy Calendar Year Tax-Payers Essay

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Research Project ACCY 171 Fall 2013 Alternative A FACTS Both Larry and Wendy are calendar-year, cash method taxpayers. The lease requires an annual rental of $2,000 due in arrears on December 31. Wendy mailed the check on December 30, and Larry received it on January 2. ISSUE In what year should each of the cash method taxpayers include the transaction as an increase or decrease in their gross income? And what are the tax consequences? CONCLUSION Larry should include the $2,000 rental amount as an increase to his gross income in the next year beginning in January. Wendy should include the expense of the $2,000 rental amount in the first year ending in December. ANALYSIS The Treasury Regulation Sec. 1.446-1(c) (i) provides, generally, under the cash receipts and disbursements method in the computation of taxable income, all items which constitute gross income (whether in the form of cash, property, or service) are to be included for the taxable year in which actually or constructively received. Expenditures are to be deducted for the taxable year in which actually made. Wendy’s gross income for that year will be decreased by the expense. Since Wendy mailed the check on December 30, she will include the expense in that year. Although Wendy mailed the check on December 30, the funds were not made readily available to Larry until January 2. For this reason, Larry will not include the rental amount in his gross income until the next year. The payment was due to Larry on December 31, but he had no way of knowing when the money was readily available or mailed by Wendy, therefore, he cannot include that amount until he receives the check. Alternative B FACTS Both Larry and Wendy are calendar-year, cash method taxpayers. The lease requires an annual rental of $2,000, due in arrears on December 31. On December 30, Wendy went to Larry’s office with a check that

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