Ted,a cash basis taxpayer,received a $100,000 bonus in 2010 when he was in the 35% marginal tax bracket.In 2011,when Ted was in the 28% marginal tax bracket,it was discovered that the bonus was incorrectly computed,and Ted was required to refund $25,000 to his employer.As a result of the refund,Ted can reduce his 2011 tax liability by $8,750 (.35 * $25,000).

Question

Quizplus · Accepted Answer

As a cash basis taxpayer, Ted would have recognized the bonus as income in the year it was received (2010) and would have paid taxes on it at his marginal tax rate of 35%. When he is required to refund $25,000 in 2011, he can deduct that amount as a business expense and reduce his taxable income by that amount, resulting in a tax savings of $8,750 (assuming he is still in the 35% bracket, which is not specified in the question).

Ted,a Cash Basis Taxpayer,received a $100,000 Bonus in 2010 When