Question

On December 31, 2018, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

a. In 2019, if payment was made at any time during that year.
b. In 2018, if payment was made on or before April 15, 2019.
c. In 2019, but only if payment was made on or before April 15, 2019.
d. In 2018, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2019.
e. None of these choices are correct.

Answer 1

Peregrine Corporation can deduct the bonus in 2018 if it was authorized and paid by April 15, 2019, due to the requirement that a cash basis related party like Charles must receive the payment for the expense to be deductible.

Step-by-step explanation:

When Peregrine Corporation can deduct the bonus depends on the specific tax rules for accrual basis businesses and the requirement for related parties (such as an employee who is also a shareholder). The correct answer is:d. In 2018, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2019.

Under the accrual method of accounting, expenses are deductible when all the events have occurred to establish the liability and the amount can be determined with reasonable accuracy, which, in this case, was December 31, 2018. However, due to special tax rules about related parties, a cash basis taxpayer like Charles must include the amount in income before Peregrine Corporation can take a deduction. The bonus is also deductible by Peregrine in the year it is accrued if it is actually paid by the 15th day of the third month after the end of the corporate tax year—in this case, April 15, 2019.