Quality Homes Ltd. (Quality)has a December 31, 2020 year end. The controller has calculated the Company's 2020 income as $50,000. However, in arriving at this amount, the controller deducted $30,000 of salary to an employee who is the sole shareholder of the Company and $5,000 of salary to an arm's length employee. Both of these amounts were paid on June 30, 2021. Which one of the following represents Quality's 2020 Net Income For Tax Purposes?

Question

Quizplus · Accepted Answer

The 2020 net income for tax purposes should reflect expenses paid or payable in 2020. Since the $30,000 salary paid to the shareholder was not paid until June 30, 2021, it should not be deducted in 2020. Therefore, the 2020 net income for tax purposes should be $50,000 + $5,000 = $55,000. However, since the question is asking for Quality's 2020 net income for tax purposes, the correct answer is $55,000, not $85,000.