Happy Sunday everyone! Can someone help me out with this one?
My question is: Why is the additional bonus of $10,000 included in Year 1 as a deduction, despite it not being accrued in Year 1? Becker's paragraph in the book states “bonuses paid by an accrual basis taxpayer are deductible in the tax year when all events have occurred that establish a liability with reasonable accuracy, and provided they are paid within 2 1/2 mo after year end.” Are we just assuming that the events occurred in Year 1? That's confusing, what if the extra bonus was for something January-March?
Soma Corp. had $600,000 in compensation expense for book purposes in Year 1. Included in this amount was a $50,000 accrual for Year 1 nonshareholder bonuses. Soma paid the actual Year 1 bonus of $60,000 on March 1, Year 2. In its Year 1 tax return, what amount should Soma deduct as compensation expense?
a.
$540,000
b.
$600,000
c.
$550,000
d.
$610,000
Explanation
Choice “d” is correct. An accrual basis employer may deduct bonuses paid to nonshareholder employees in the year of accrual if the bonuses are subsequently paid within 2 ½ months after the close of the tax year. Since the $50,000 accrued at year-end Year 1 was paid by March 15, Year 2 (2 ½ months), the $50,000 accrual is deductible as compensation expense. The additional $10,000 bonus paid on March 1, Year 2 is also deductible in Year 1, even though it was not accrued at year-end Year 1. Therefore, the total compensation is $600,000 + $10,000, or $610,000.
Choice “b” is incorrect. The additional $10,000 of bonus that was paid by March 15 of the next year is deductible in Year 1.
Choice “c” is incorrect. Both the $50,000 accrual and the additional $10,000 bonus paid is deductible, assuming it is paid by March 15, Year 2.
Choice “a” is incorrect. This answer assumes that the candidate is subtracting the entire $60,000 of bonus paid by March 15 from deductible compensation expense. This is incorrect because both the $50,000 accrual and the additional $10,000 paid by March 15, Year 2 are deductible.
AUD (2/3/2015) Pass
REG (4/24/2015) Pass
FAR (8/3/2015) Pass
BEC (10/25/2015) Pass
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