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sidekickin
Level 3

Accrual Method Accounting For Depreciation Purposes

I have farm equipment that is classified as 5-year property for depreciation purposes that I will be receiving rent payments on.  This is a passive investment.  It will go into service mid-November this year.  I plan on using straight-line depreciation.  I will receive rent payments every 3 months (prepaid rent).  I will receive the first check when the equipment goes in to service (for period 11/15/21 - 2/15/22).  As far as depreciation goes, I must use mid-quarter depreciation for this first year which won't yield me much of a deduction this year.  Unfortunately, the deduction will not be enough to cover the income from the first check.  However, normally the straight-line depreciation amounts will exactly cover the income received over the 5 year depreciation period.  I would like to defer paying taxes for the 5 year period using the depreciation.  If the equipment would be placed in service at the beginning of 2022, I would not have a problem doing this.  But with the equipment being put into service mid-quarter of the last quarter of the year, and receiving a prepaid rent payment for the next 3 months going in to 2022, unless I can use an accrual method of accounting for the rent payments, I will have taxable income on the investment this year.  This is simply a passive investment in addition to my wage income.  Is it possible to only show the portion of the rent payment that is for 2021 (1.5 months) for tax purposes?  If so, the mid-quarter depreciation amount for this last quarter of 2021 would cover the amount of the 3-month rent payment that is for 2021 rent.  I can then show the remaining 1.5 months that is actually for 1/1/22 - 2/15/22 on 2022 taxes, if this is possible.  Any other ideas or suggestions on handling this issue?

2 Replies
MMTaxMM
Level 10

Accrual Method Accounting For Depreciation Purposes

Not sure if you're aware....you can't change to accrual from cash on a whim....it's a formal change that needs to be made as an election and you have to file form 3115 to do it. Also the change would affect EVERYTHING and not just your rental income and depreciation. I doubt you will even be able to change from a cash method anyway. Sometimes you don't have any good options other than to pay the amount of tax you owe.

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Mike9241
Level 15

Accrual Method Accounting For Depreciation Purposes

even under the accrual method tax laws say rent received in advance is taxable when received.

 

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