Ralph, a cash basis taxpayer, owns an office building that he leases to various tenants. During 20X8, he signed a three-year lease with a tenant and received a check for $16,000 for the following: Rent for November 1, 2008 to October 1, 2009 $5,000
Advance rent for last three months of lease 600
Security deposit (refundable) 400

For the current year, 2008, Ralph must report income of:

a. $6,000
b. $5,600
c. $5,000
d. $832
e. some other amount.

b. $5,600

Explanation:

A cash basis taxpayer will report revenues and expenses when they are actually collected or paid for. The business transaction is not directly related to the moment that the payment occurs (unlike accrual accounting).

in this case, Ralph should report all the income related to monthly rental payments = $5,000 (Nov. 2008 - Oct. 2008) + $600 (the three last months of rent) = $5,600. Security deposits are not considered rental revenue, so they should not be reported as such.