Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $680 per month, payable on the first of the next month, and the tenant must make a $680 security deposit that is refunded at the end of the lease. Under lease 2, the building rents for $7,480 per year, payable at the time the lease is signed, but no security deposit is required. Under lease 3, the building rents for $680 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,360 that is to be applied toward the rent for the last two months of the lease. (Leave no answers blank. Enter zero if applicable.)
a. What amounts are included in Ralph’s gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease?
Amount included in Gross Income:
b. What amounts are included in Ralph’s gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?
Amount included in Gross Income:
c. What amounts are included in Ralph’s gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease?

A. Amount included in gross income$0

B. Amount included in gross income$7,480

C. $2,720

Explanation:

aThe amount included in Gross income this year, assuming the tenant signs lease 1 on December 1

As Ralph is a calendar year, cash method taxpayer, he will only put the cash receipt of rent

Rent for the month will be payable on first on next month, therefore, rent for December he will receive in January and the calendar year will on ends on 31st December therefore, he will not put any amount

this year.

Security deposit is a liability, and will be returned at the end of the lease, therefore it is not a income.

Amount included in gross income$0

b. The amount that is put in gross income, assuming the tenant signs lease 2 on December 31 is $7480, he has to pay

the years rent in advance when he sign the lease

Amount included in gross income$7,480

c. The amount that is put in gross income, assuming the tenant signs lease 3 on November 30, will be the amount of

rental income of 2 months (November and December) that is paid in the starting of each month and security

deposit that is to be applied toward last two months of the lease.

Amount included in gross income

Rental income is calculated as $680 x 2 months

$1,360

Security deposit is calculated as Advance rent for last two months)

$1,360

Total$2,720