Question

Maud, a calendar year taxpayer, is the owner of a sole proprietorship that uses the cash method. On February 1, 2019, she leases an office building to use in her business for $197,250 for an 18-month period. To obtain this favorable lease rate, she pays the $197,250 at the inception of the lease.

How much rent expense may Maud deduct on her 2019 tax return? Round any calculations to two decimal places and round the final answer to the nearest dollar.

Answer 1

If a business is following the cash method for accounting and tax return purpose, then any expense paid in advance for over a year can be deducted only in the period or years to which those applies. All these expenses should be prorated over the period instead of deducting in full in the tax year in which it was paid in advance in cash. Thus the treatment here is exactly like capital expenditure, which is carried forward to the period for which the cash expense has been made.

The rent expense that Maud could deduct on her 2019 tax return would be the 11 months rent paid in cash out of 18 months rent paid in cash on Feb 1, 2019. So, on prorata-basis, the rent comes = 197250*11/18 = $120541.70.