Howard is a cash-basis, calendar-year taxpayer.He works for Clyde Corporation, an accrual-basis, calendar-year corporation.Clyde authorizes a $10,000 bonus for Howard on December 20, year 1.It pays the bonus on March 31 of year 2.Which of the following is correct?

Question

Quizplus · Accepted Answer

Howard, being a cash-basis taxpayer, recognizes income when it is actually or constructively received. Since he receives the bonus in year 2, he will recognize it in year 2. Clyde Corporation, being an accrual-basis taxpayer, would typically recognize expenses when they are incurred. However, for tax purposes, the IRS requires that the payment must also meet the "all events test" and economic performance has occurred. Since the bonus is paid in year 2, this is when Clyde can take the deduction, aligning the deduction with the year of payment.

Howard Is a Cash-Basis, Calendar-Year Taxpayer