QUESTION 1 - Your client, Phil McCavity, DDS, is a dentist who is a cash basis taxpayer. Phil is in the 40% tax bracket. He leases office space from the owner of a medical office building. In July 2017 he entered into a ten year lease with an option to extend his lease for another two years. The lease calls for rent of $24,000 per month in the first year and provides for annual rent adjustments based on the Consumer Price Index. It is December 2017 and your client has asked how much he will save in taxes for 2017 if he prepays the January 2018 rent before December 31, 2017. What is your answer?
QUESTION 2 - Assume the same facts as above, except that the lease calls for rent increases of $1,000 per month in each of the first five years and increases of $1,200 per month for the next five years. If he exercises the renewal option, the monthly lease payment increases by $1,500 every year. How much will your client save in 2017 taxes if he prepays the January 2018 rent before December 31, 2017?