Harold is a 90% owner of National Homes Construction,an accrual basis S corporation.On December 30,2013,National Homes accrues a $100,000 bonus to Harold,payable on February 15,2014.
I.If Harold is an accrual basis taxpayer,National Homes deducts the bonus in 2013 and Harold reports the income in 2014.
II.If Harold is a cash basis taxpayer,National Homes deducts the bonus in 2013 and Harold reports the income in 2014.

Question

Quizplus · Accepted Answer

In an accrual basis S corporation, the corporation reports income and expenses when they are earned or incurred, regardless of when they are actually paid. However, for a cash basis taxpayer like Harold, income is only reported when it is received and expenses are only deducted when they are paid.

Therefore, in this scenario, National Homes Construction would accrue the $100,000 bonus in 2013, but since it is not actually paid until 2014, it cannot be deducted in 2013. As a result, neither statement is correct.

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