On December 31, 2011, Lavender, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2012. Lavender can deduct the bonus in 2012, the year in which it is included in Barry's gross income.

Question

Quizplus · Accepted Answer

This is because Lavender, Inc. is an accrual basis C corporation, and the bonus was accrued in 2011. Even though the payment was made in 2012, the bonus can still be deducted in 2012, the year in which it is included in Barry's gross income, as per the matching principle of accrual accounting.