In 2016, Godfrey received a $50,000 sales commission on a long-term contract. But in 2017, the customer filed bankruptcy and Godfrey's 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 2016 but he is in the 25% marginal tax bracket in 2017.
A)Godfrey can amend his 2016 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2017 and thus his tax savings will be $5,000.
C)Godfrey can reduce his 2017 tax liability by 35% × $20,000 = $7,000.
D)Godfrey should not have reported the income in 2016 because of the contingencies.
E)None of the above.

Question

Quizplus · Accepted Answer

Godfrey can reduce his 2017 tax liability by claiming a credit for the tax paid on the $20,000 he had to repay, calculated at his 2016 tax rate of 35%, resulting in a $7,000 reduction.

In 2016, Godfrey Received a $50,000 Sales Commission on a Long-Term