On December 31, 2016, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer), who owns 75% of the corporation's outstanding stock. The $50,000 bonus is paid to the president on February 2, 2017. For Flamingo's 2016 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

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The bonus is not deductible in 2016 because it was paid to a related party (the president who owns more than 50% of the corporation) after the end of the tax year. It is deductible in the year it is paid, 2017.