Question

Josie owns 100 % of Josie Inc. On December 31, 2019 Josie Inc decares the following bonuses. Please Feb $ 50,000 to Josie $ 30,000 to Bruce (unrelated to Josie) $ 20,000 to Miles (unrelated to Josie) Explain! m oul The bonuses to Josie and Bruce are paid on February 1, 2020 The bonus to Miles is paid on May 1, 2020 The bonus to Josie is deductible in 2020. The 2 1/2 month payment rule does not apply to a related party The bonus to Bruce is deductible in 2019 because made within 21/2 months of 2019 year end The bonus to Miles is deductible in 2020 as not made within 2 1/2 months of 2019 year end Gary Inc has an allowance of doubtful accounts to account for bad debts. Here is the activity for 2019 Balance at Jan 1, 2019 2019 accruals for bad debts 2019 write offs of specific accounts Balance December 31, 2019 $50,000 80,000 -60,000 70,000 Book expense Tax deduction Unf Temp Diff 80,000 60,000 20,000

Answer 1

For this first you need to understand tax law which allows the deduction of the expense during that year if it is paid with in the period of 2 and 1/2 month from the end of tax year in this case December 31 2019,but for this law related parties are not included

In this case Josie Inc declare bonus on December 31 2019 this is followed by most of the companies to have the benefits of tax deductible for that year, that is they would expense the bonus in the tax year 2019, but as per the rule they can expense the bonus for the tax year 2019 if they pay that bonus to Bruce and Miles with in 2 and ½ month from December 31 2019

Whereas in this case they have paid Bruce with in the 2 and half month from the December 31 2019 and They paid Miles after that window period hence they can expense bonus for the tax year ending December 31, 2019 for the Bruce only

And they paid bonus to Miles in May 1^st, 2020 which does not falls under window period they could expense that for the tax year 2020

For related party Like Josie the rules is bit different they would be expensed as per accrual hence they would expense it for the year 2020 tax year