Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2014, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2014, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 3, 2015, compute Ivory Corporation's 2014 deduction for the above amounts.
A) $250,000.
B) $225,000.
C) $200,000.
D) $125,000.
E) None of above.

Question

Quizplus · Accepted Answer

According to the rules for accrual basis taxpayers, compensation is deductible when earned rather than when paid. Therefore, Ivory Corporation can deduct the $100,000 salary paid to each shareholder in 2014. In addition, because the corporation accrued $25,000 of bonus compensation to each shareholder as of December 31, 2014, it can deduct that amount in 2014 as well. The fact that the bonuses were paid to the shareholders in 2015 has no impact on the corporation's 2014 deduction. Therefore, the total deduction for 2014 is ($100,000 + $25,000) * 2 = $250,000. However, since Craig and Oscar have different ownership percentages, the deduction must be apportioned between them based on their ownership percentages. Craig's deduction is $87,500 ($250,000 * 0.35), and Oscar's deduction is $162,500 ($250,000 * 0.65).

Ivory Corporation, a Calendar Year, Accrual Method C Corporation, Has