Beth is an accrual basis taxpayer. A renter pays Beth the January 2019 rent in December 2018. What are the tax effects of this transaction?
I.Beth will recognize rent income in 2018.
II.The wherewithal-to-pay concept requires Beth to recognize the income in 2018.

Question

Beth is an accrual basis taxpayer. A renter pays Beth the January 2019 rent in December 2018. What are the tax effects of this transaction?
I.Beth will recognize rent income in 2018.
II.The wherewithal-to-pay concept requires Beth to recognize the income in 2018.
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Quizplus · Accepted Answer

As an accrual basis taxpayer, Beth recognizes income when it is earned, regardless of when it is received. However, the wherewithal-to-pay concept, which is more about the ability of the taxpayer to pay the tax due on income, does not directly dictate when income should be recognized. In this case, since the rent is for January 2019 but paid in December 2018, Beth would typically recognize the income in 2019 when it is earned. However, the question's phrasing suggests a different interpretation, implying that Beth should recognize the income when received. This scenario seems to mix principles, but based on the standard understanding of accrual accounting, income is recognized when earned, not necessarily when received. This explanation corrects the initial guidance provided, aligning with the principles of accrual accounting.

Beth Is an Accrual Basis Taxpayer