Joline is a cash basis taxpayer. A renter pays Joline the January 2018 rent in December 2017. What are the tax effects of this transaction?
I.Joline will recognize rent income for tax purposes in 2018.
II.The wherewithal-to-pay concept is the basis for Joline's recognition of the income in 2018.

Question

Joline is a cash basis taxpayer. A renter pays Joline the January 2018 rent in December 2017. What are the tax effects of this transaction?
I.Joline will recognize rent income for tax purposes in 2018.
II.The wherewithal-to-pay concept is the basis for Joline's recognition of the income in 2018.
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Quizplus · Accepted Answer

As a cash basis taxpayer, Joline must recognize income when it is actually or constructively received. Since the rent for January 2018 was paid in December 2017, Joline must recognize the rent income in 2017, not 2018. The wherewithal-to-pay concept is not the basis for recognizing the income in 2018; it actually supports recognizing income when the taxpayer has the ability to pay the tax, which in this case would be when the income is received in 2017.

Joline Is a Cash Basis Taxpayer