Question

Broadbill Corporation, a calendar year C corporation, has two unrelated cash method shareholders: Marcia owns 51% of the stock, and Zack owns the remaining 49%. Each shareholder is employed by the corporation at an annual salary of $240,000. During 2020, Broadbill paid each shareholder-employee $220,000 of his or her annual salary, with the remaining $20,000 paid in January 2021. Determine how much of the 2020 salaries for Marcia and Zack is deductible by Broadbill in 2020 if the corporation is (a) a cash method taxpayer and (b) an accrual method taxpayer.

Answer 1

A. $440,000

B. $460,000

Step-by-step explanation:

a. Calculation for the amount deductible under the cash method taxpayer

Using this formula

Amount Deductible =Actual payments *Number of Shareholders

Let plug in the formula

Amount Deductible = ($220,000 × 2)

Amount Deductible =$440,000

Therefore the amount deductible under the cash method taxpayer will be $440,000

b. Calculation for the amount deductible under the accrual method taxpayer

Using this formula

Amount Deductible = Amount paid to each shareholder-employee +Each shareholder annual salary

Let plug in the formula

Amount Deductible = $220,000+$240,000

Amount Deductible = $460,000

Therefore the amount deductible under the accrual method taxpayer will be $460,000