In 2012, Godfrey received a $50,000 sales commission on a long-term contract. But in 2013, 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 2012 but he is in the 25% marginal tax bracket in 2013.
A)Godfrey can amend his 2012 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2013 and thus his tax savings will be $5,000.
C)Godfrey can reduce his 2013 tax liability by 35% ´ $20,000 = $7,000.
D)Godfrey should not have reported the income in 2012 because of the contingencies.
E)None of the above.

Question

Quizplus · Accepted Answer

Godfrey can reduce his 2013 tax liability by 35% x $20,000 = $7,000 because he can claim a deduction for the $20,000 repayment in the year that it was made. It is not possible for Godfrey to amend his 2012 tax return since the repayment was made in 2013. Deducting the $20,000 paid in 2013 would result in a tax savings of $5,000 assuming his marginal tax rate in 2013 is 25%. Godfrey was required to report the income in 2012 since it was earned that year and the contingencies surrounding the contract wouldn't have changed this requirement. Therefore, the correct answer is (C).

In 2012, Godfrey Received a $50,000 Sales Commission on a Long-Term