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  3. taxpayer is on the cash method. on december 1, tax

Taxpayer is on the cash method. On December 1, Taxpayer receives a signed agreement with...

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Accounting

Taxpayer is on the cash method. On December 1, Taxpayer receives a signed agreement with Customer in which Customer agrees to Taxpayer $5,000 for restoring Customer's vehicle. Taxpayer completes the restoration on December 28. Not entirely pleased with the work, Customer pays Taxpayer $4,500 on January 5, Year 2. Taxpayer decides not to pursue the $500 difference. What are the results to Taxpayer?
Taxpayer has no gross income in year 1 and $4,500 gross income in year 2.
Taxpayer has gross income in year 1 of $5,000 because the agreement is a cash equivalent. Taxpayer is entitled to a deduction of $500 in year 2.
Taxpayer has gross income of $4,500 in Year 1 because Taxpayers finds out before filing the Year 1 tax return that only $4,500 would be received.
Taxpayer has $5,000 gross income in Year 2 because Taxpayer voluntarily relinquished the claim to the remaining $500.
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