Question 1 Addison, a cash method taxpayer, just learned about the concept of cash method versus accrual method a few day ago. Addison immediately come up with a "brilliant idea" to help him pay as little tax as possible in 2020 by playing with the timing advantage of cash method. Since 2020 is an exceptional good year for Addison's online business, he sees his income extremely high. Below are actions that Addison are planning on taking to reduce his 2020 taxable income: 1. Advising all clients to instead of paying him by cash, they should pay him by checks (assume no limitation on when the checks can be redeemed). In that way, Addison can have the flexibility to when to cash in those check and, thus, control when he will recognize his income in 2020. For example, if he receives $300k worth of checks in 2020, he can just cash out $10k and save the remaining $200k for next year. So, in 2020, Addison will only be tax on $50k instead of $100k. 2. Prepaying his warehouse rental expenses for the next 2 years (2021 and 2022). In that way, he can deduct all of those in 2020 and thus reducing his taxable income down significantly. 3. Selling a few business equipment from his online business for a dirt- cheap price to his second company (which he is also the primary owner). In that way, he can recognize a huge amount of loss from disposition of business assets and thus further reduce his taxable income. What is your thought on each of the 3 strategies above? Will it work or not? Explain in detail. Question 1 Addison, a cash method taxpayer, just learned about the concept of cash method versus accrual method a few day ago. Addison immediately come up with a "brilliant idea" to help him pay as little tax as possible in 2020 by playing with the timing advantage of cash method. Since 2020 is an exceptional good year for Addison's online business, he sees his income extremely high. Below are actions that Addison are planning on taking to reduce his 2020 taxable income: 1. Advising all clients to instead of paying him by cash, they should pay him by checks (assume no limitation on when the checks can be redeemed). In that way, Addison can have the flexibility to when to cash in those check and, thus, control when he will recognize his income in 2020. For example, if he receives $300k worth of checks in 2020, he can just cash out $10k and save the remaining $200k for next year. So, in 2020, Addison will only be tax on $50k instead of $100k. 2. Prepaying his warehouse rental expenses for the next 2 years (2021 and 2022). In that way, he can deduct all of those in 2020 and thus reducing his taxable income down significantly. 3. Selling a few business equipment from his online business for a dirt- cheap price to his second company (which he is also the primary owner). In that way, he can recognize a huge amount of loss from disposition of business assets and thus further reduce his taxable income. What is your thought on each of the 3 strategies above? Will it work or not? Explain in detail
