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:

Year 1 (when accrued)

Year 2 (when paid)

Never

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.

Question 66 All questions Question 68

Practice the full CPA TCP Practice Exam 4

68 questions · hints · full answers · grading

More questions from this exam

Q01In Year 1, an executive exercises Incentive Stock Options (ISOs) to purchase 1,000 shares of comp...Medium Q02A taxpayer provides an interest-free loan of $200,000 to their adult child on January 1, Year 1, ...Hard Q03A taxpayer, age 15, has $4,500 of interest income and no earned income in Year 1. The taxpayer is...Medium Q04A taxpayer anticipates their marginal tax rate will increase from 24% in Year 1 to 35% in Year 2....Medium Q05A taxpayer is subject to the safe harbor rules for estimated tax payments. Their Year 1 Adjusted ...Medium

View all 68 questions →