ExpertMedium1 markMultiple Choice
CPA · Question 67 · Area IV: Property Transactions
An accrual basis corporation owes $10,000 bonus to its cash basis shareholder (who owns 60% of the stock). The bonus is accrued in Year 1 but paid in Year 2. When can the corporation deduct the bonus?
An accrual basis corporation owes $10,000 bonus to its cash basis shareholder (who owns 60% of the stock). The bonus is accrued in Year 1 but paid in Year 2. When can the corporation deduct the bonus?
Answer options:
A.
Year 1 (when accrued)
B.
Year 2 (when paid)
C.
Never
D.
Year 1, provided it is paid within 2.5 months.
How to approach this question
Related Party Rule: Accrual payer is placed on Cash method for payments to Cash basis related payee.
Full Answer
B.Year 2 (when paid)✓ Correct
IRC §267(a)(2). If a payee is a related party (more than 50% owner) and on the cash method, the accrual basis payor cannot deduct the expense until the day the payee includes it in income (Year 2).
Common mistakes
Applying the 2.5 month rule which is for non-related parties.
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