Question

Emily is a cash basis taxpayer, and she was an especially productive salesperson last year. In December of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonus check after year end. Identify the principle that will determine when Emily is taxed on the bonus:

A. Assignment of income
B. Constructive receipt
C. Return of capital principle
D. Wherewithal to pay
E. All of these

Answer 1

Emily will be taxed on her bonus based on the principle of Constructive receipt, which taxes income when it is actually available to the taxpayer without restriction.

Step-by-step explanation:

The principle that will determine when Emily is taxed on her bonus is Constructive receipt. According to the constructive receipt principle, income is to be included in gross income for the tax year in which it is credited to the taxpayer's account or made available to the taxpayer without restriction, even if not actually in the taxpayer's possession. In Emily's case, she would be taxed on the bonus when she actually receives the check, and not when she was notified about earning it, as that is when she has control and access to the funds.