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Determining tax deductions for three types of rent payments made by Stovall

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Stovall LLC uses the calendar year and the cash method of accounting for tax purposes. It made the following rent payments on December 31, 2003. In each case, determine Stovall's 2003 deduction for the payment.

a. $30,000 for the use of equipment under a six-month lease that began on May 1, 2003.
b. $1,750 rent for warehouse space for the month of January 2004.
c. $48,000 rent for office space for the 24-month period beginning on January 1, 2004.

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Solution Summary

The solution includes calculations and explanations for each part of the problem, but also details some special rules with regard to tax deductions for these types of items.

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The cash method of accounting usually offers more flexibility in tax planning because a business is able to time the receipt of revenue or payments of expenses to shift from one tax year to another. Expense is not recorded until the cash is paid.

The cash method allows you to deduct expenses in the year they are paid; however, some expenditures are not entirely deductible. For example, the purchase price of capital assets must be depreciated over a number of years.

A calendar year is 12 consecutive months ...

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