Harold is a 90% owner of National Homes Construction,an accrual basis S corporation.On December 30,2015,National Homes accrues a $100,000 bonus to Harold,payable on February 15,2016.
I.If Harold is an accrual basis taxpayer,National Homes deducts the bonus in 2015 and Harold reports the income in 2016.
II.If Harold is a cash basis taxpayer,National Homes deducts the bonus in 2015 and Harold reports the income in 2016.

Question

Harold is a 90% owner of National Homes Construction,an accrual basis S corporation.On December 30,2015,National Homes accrues a $100,000 bonus to Harold,payable on February 15,2016.
I.If Harold is an accrual basis taxpayer,National Homes deducts the bonus in 2015 and Harold reports the income in 2016.
II.If Harold is a cash basis taxpayer,National Homes deducts the bonus in 2015 and Harold reports the income in 2016.
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Quizplus · Accepted Answer

Neither statement is correct.

If Harold is an accrual basis taxpayer, National Homes accrues the bonus in 2015, but the deduction depends on when the payment is made. If the payment is made by March 15, 2016 (within 2.5 months after year-end), National Homes can deduct the bonus in 2015. In this case, Harold will also report the income in 2015 because he is a greater than 50% owner of the S corporation.

If Harold is a cash basis taxpayer, National Homes can only deduct the bonus when it is actually paid. Therefore, the deduction would be taken in 2016, and Harold would report the income in 2016 as well.

Harold Is a 90% Owner of National Homes Construction,an Accrual