Final answer:
The question is about the tax deductibility of accrued bonuses for employee-shareholders of a C corporation. It delves into whether these bonuses can be deducted in the current tax year, given that such deductions are subject to close scrutiny to avoid disguised dividends. The effective tax rate is also a factor in determining the actual tax benefit for the company.
Step-by-step explanation:
The subject matter in question pertains to accrual basis tax accounting for a calendar-year C corporation. Specifically, it involves the accrual and deduction of employee bonuses and the implications of shareholder participation on such deductions. North Inc., by being an accrual-basis taxpayer, recognizes expenses when they are incurred rather than when they are paid. For U.S. income tax purposes, corporate tax deductions for bonuses to shareholders are subject to certain restrictions to prevent disguised dividend payments.
To determine if the accrued bonuses are deductible in year 1, it must be established whether these amounts are paid within 2.5 months of the year-end, as per tax law requirements for deductibility when shareholders are involved. Since the question does not provide payment timing information, the bonuses may only be deductible if they are paid according to the requirements. The C corporation’s effective tax rate will also factor into the actual tax savings from any deductions.
Using the provided self-check questions, a firm with $1 million in sales revenue, spending $600,000 on labor, $150,000 on capital, and $200,000 on materials, would have an accounting profit of $50,000.