On December 10 of the current year, Gonzalez Corporation (a calendar-year taxpayer) accrues an obligation for...

On December 10 of the current year, Gonzalez Corporation (a calendar-year taxpayer) accrues an obligation for a $125,000 bonus to Latasha, a sales representative who had had an outstanding year. Latasha owns no Gonzalez Corporation stock. The bonus is paid on May 5 of the next year.

What is Gonzalez's deduction for the current year? What is Gonzalez's deduction for next year? Explain you answer.

Expert Solution

As per tax provisions, under an accrual method of accounting, a liability (e.g., an accrued bonus) is incurred, and generally deductible, in the tax year in which

1. All events have occurred to establish the fact of the liability

2. the amount of the liability can be determined with reasonable accuracy

3. economic performance has occurred for the liability.

All events have occurred that determine the fact of the liability when

a) The event fixing the liability, whether that be the required performance or other event, occurs, or

b) Payment therefore is due, whichever happens earliest.

In the given case liability of bonus is accrued on december 10 of current year to latasha for outstanding performance. Hence all event occured to establish the fact of liability, amount of liability is determined with reasonable accuracy and economic performance has occured. Therefore Gonazlez deduction in current year will be $125,000 and he will not get deduction in year of payment.

If Goanzler is cash basis taxpayer then dedcution of $125,000 will be allowed in next year and no deduction will be allowed in current year.

ekkarill92 answered 1 year ago

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