Maureen is a cash-basis, calendar-year taxpayer and works as a sales manager for Teton Corporation, an accrual basis, calendar-year corporation. Teton's president and 100 percent owner, Tom, (also a cash-basis taxpayer) authorizes a $25,000 bonus for Maureen and a $100,000 bonus for himself on December 22, year 1. The company pays his bonus on February 2, but fails to pay Maureen's bonus until March 30, year 2.

Question

Quizplus · Accepted Answer

B  A) Maureen recognizes the $25,000 bonus as income in year 2 when she receives it, while Tom recognizes his $100,000 bonus as income in year 2 when he receives it. As cash-basis taxpayers, they recognize income when it is actually received.  B) Teton Corporation, as an accrual-basis taxpayer, can deduct the bonuses in year 1 because the bonuses were authorized and the liability was fixed in year 1, even though they were paid in year 2.  C) If both bonuses were paid on February 2 of year 2, Teton's compensation deduction for both bonuses would still be in year 1, as the liability was fixed in year 1.

Maureen Is a Cash-Basis, Calendar-Year Taxpayer and Works as a Sales