In 2019, Godfrey received a $50,000 sales commission on a long-term contract.But in 2020, the customer filed for bankruptcy and his employer was not able to collect from the customer.Under the bonus agreement, Godfrey was required to repay the employer $20,000 of the bonus.Godfrey was in the 35% marginal tax bracket in 2019 but he is in the 24% marginal tax bracket in 2020.
A)Godfrey can amend his 2019 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2020 and thus his tax savings will be $4,800.
C)Godfrey can reduce his 2020 tax liability by 35% × $20,000 = $7,000.
D)Godfrey should not have reported the income in 2019 because of the contingencies.
E)None of these.

Question

Quizplus · Accepted Answer

Godfrey can use the claim of right doctrine, which allows him to reduce his 2020 tax liability by the amount of tax paid on the $20,000 in 2019, which is $7,000 (35% of $20,000).

In 2019, Godfrey Received a $50,000 Sales Commission on a Long-Term