Question

In 2019, Godfrey received a $50,000 sales commission on a long-term contract. But in 2020, the customer filed for bankruptcy and his employer was not able to collect from the customer. Under the bonus agreement, Godfrey was required to repay the employer $20,000 of the bonus. Godfrey was in the 35% marginal tax bracket in 2019 but he is in the 24% marginal tax bracket in 2020.A) Godfrey can amend his 2019 tax return and reduce his taxable income by $20,000.

B) Godfrey should deduct the $20,000 paid in 2020 and thus his tax savings will be $4,800.
C) Godfrey can reduce his 2020 tax liability by 35% × $20,000 = $7,000.
D) Godfrey should not have reported the income in 2019 because of the contingencies.
E) None of the above.

Answer 1

C) Godfrey can reduce his 2020 tax liability by 35% × $20,000 = $7,000.

Step-by-step explanation:

When Godfrey received the sales commission last year, he included it as ordinary income and paid taxes taxes for it. Since his customer defaulted and couldn't pay his debt, Godfrey now has to return part of the that sales commission, but he is also entitled to reducing the taxes that he priory paid for it. Since he paid taxes in the 35% tax bracket, he should also reduce his current taxes in the same marginal tax rate.