Question

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1 st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

Answer 1

Marilyn must recognize $200 as income this year to minimize her tax burden.

Step-by-step explanation:

Marilyn must recognize income based on the percentage of services rendered during the current year. Since she received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months, she must recognize 1/20th (or 5%) of the prepayment as income in the current year.

Therefore, Marilyn must recognize $200 ($4,000 x 5%) as income this year to minimize her tax burden.