Question

A cash-basis individual taxpayer owns 55% of Stone, a C-corporation. Stone uses the accrual method of accounting and owes the taxpayer $4,500 for rent incurred during year 1. In year 2, one-half of this expense was paid and reported as income by the taxpayer. What amount of this expense may Stone deduct for year 2?

Answer 1

Answer: $2,250

Explanation:

The Tax-Payer uses a cash-basis. This means that they recognize revenue or expenses only when they are actually paid as opposed to an Accrual basis entity that recognizes revenue or expenses when it is incurred.

As the Cash-Basis taxpayer is the majority shareholder of the company, Stone may not deduct the amount from income until they have paid the tax payer because tax regulations state that when an Accrual Basis entity owes a majority owner who uses the Cash basis, they may not recognize the deduction until they have paid the owner.

In year 2 they paid ½ of the rent which is,

= 4,500/2

= $2,250

They can therefore only deduct $2,250 in Year 2.