An electrician completes a rewiring job and is paid $1,000 by the customer in November.The customer has a small fire in his house and sues the electrician for the repayment of the $1,000 fee plus damages in December.The electrician reaches a settlement with the customer in the following February and refunds the $1,000 fee.How should the electrician treat these events when he files his tax return in April?
A)No income will be reported.
B)The income will be reported for the year of receipt,and a tax deduction will be claimed on the tax return for the year of repayment.
C)The income will be reported for the year of receipt,and then an amended return will be filed in the following year to claim the refund.
D)Both the income and the deduction will be reported on the same tax return (for the year of receipt).

Question

Quizplus · Accepted Answer

The electrician should report the income of $1,000 as received in the year of receipt, which is November. Then, in the year of repayment, which is February of the following year, the electrician should claim a tax deduction for the $1,000 refund. This is the correct method of reporting income and expenses when they occur in separate tax years.

An Electrician Completes a Rewiring Job and Is Paid $1,000