Question

1.Marilyn operates a day care center as a cash-method sole proprietorship. On August 1st of this year, Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

2 .David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows:

....... . .... ... .. Receipts . . Expenses
February through December last year $ 112,000 . .    $ 84,500
January this year . . . $10,400 . . $6,200
  

What income should David report from his sole proprietorship?

Answer 1

ANSWER:

1.

Under Cash Method of Accounting Income is recognized when actually or constructively receipt that is check received at year-end but not Deposited.

In Given Case, Marilyn received prepayment of $ 4,000 for the child care service to be rendered for next 20 Months. So, As Per Cash Method of Accounting Marilyn has to show entire $ 4,000 as his Income for Income Tax Purpose.

So, By Taking into account Cash Method Of Accounting Marilyn must recognize $ 4,000 as his Income.

2.

Income Reported by David from his Sole Proprietorship under Cash Method.

Under Cash Method, Income and Expenses are Recognized when it is actually received and Paid respectively.

For Current Year Tax Purpose, David has to consider Period of February 1 (Beginning of Operations) to December 31 of last year as David Follows calendar year for tax purpose.

Taxable Income from February 1 to December 31 Under Cash Method = Receipt (-) Expenses

$ 112,000 (Provided) (-) $ 84,500 (Provided)

$ 27,500.

Thus, David should report Income of $ 27,500 from his Sole Proprietorship.

Note- Receipt and Expenses of January this year will be considered for tax purposes in next taxable year and not in current taxable year.