Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 55% of the stock, and Oscar owns the remaining 45%. During 2012, Ivory paid a salary of $200,000 to each shareholder. On December 31, 2012, Ivory accrued a bonus of $50,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2013, compute Ivory Corporation's 2012 deduction for the above amounts.
A)$0.
B)$250,000.
C)$400,000.
D)$450,000.
E)$500,000.

Question

Quizplus · Accepted Answer

Ivory Corporation can deduct reasonable compensation paid to its shareholders as long as it is deemed reasonable and ordinary in the industry. In this case, each shareholder is paid a salary of $200,000, which seems reasonable for their services. Therefore, Ivory Corporation can deduct $400,000 ($200,000 to Craig and $200,000 to Oscar) as compensation paid to its shareholders on its tax return.

In addition, the bonus of $50,000 to each shareholder can also be deducted as long as it is deemed reasonable and not excessive. Since the total bonuses paid to both shareholders are $100,000, Ivory Corporation can deduct this amount on its tax return.

Therefore, Ivory Corporation can deduct a total of $500,000 ($400,000 in salaries and $100,000 in bonuses) on its tax return for 2012. Since it is a C corporation, the deduction is taken at the corporate level, not at the shareholder level.

Ivory Corporation, a Calendar Year, Accrual Method C Corporation, Has