What if juan marginal tax rate was thirty- five percent

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In 2018, Juan entered into a contract to for a book. The publisher advanced Juan $50,000, which was to be repaid out of future royalties. If the book was not completed by the end of 2019, however, Juan would be required to repay the publisher for the advance. Juan did not complete the book in 2019, and in accordance with the agreement, he repaid the $50,000 to the publisher in 2020. Juan is a cash basis taxpayer.

Question 1: Indicate whether the following statements are "Correct" or "Incorrect". Assume Juan's marginal tax rate is 15% in 2018 and 35% in 2020.

  1. Juan could elect to include the $50,000 advance as gross income in either 2018 or 2019. Incorrect
  2. In 2019, he would be allowed a deduction for $7,500. Incorrect 
  3. Since he can defer reporting the advance until it is earned, he has no income when the advance is received. Therefore, he has no offsetting deduction when the advance is repaid. Incorrect 
  4. The deduction in 2020 would reduce his taxes by $17,500. Correct

Question 2: What if Juan's marginal tax rate was 35% in 2018 and 12% in 2020?

Reference no: EM132642040

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