Question

TUULI (LU. 2, 3) Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Troy is a full-time employee of the corporation and receives a salary of $60,000 per year. He also receives a bonus equal to 10% of all collections from clients he serviced during the year (which he receives in January of the following year). Determine the tax consequences of the following events to the corporation and to Troy: a. On December 31, 2020, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2020. Troy did not deliver the check to the corporation until January 2021. The corporation recognizes the income in: Troy recognizes the bonus related to this collection in: b. Assume Eagle Corporation is an accrual basis taxpayer. On December 31, 2020, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2020. Troy deposited the check on December 31, bu the bank did not add the deposit to the corporation's account until January 2021. The corporation recognizes the income in: Troy recognizes the bonus related to this collection in: Previous Next

Answer 1

Answer-

Part a)

Eagle corporation and Troy are both cash basis taxpayers. A cash basis tax payer should recognize revenues/expenses as soon as it received/incurred them. The cheque of $10,000 handed over by the customer (to Troy) will be treated as corporation's income for the year 2020 as Troy is company's representative/agent and cheque is treated just like cash in the ordinary course of business. Troy, however, will recognize the bonus in the year 2021 at the time when he actually receives the same.

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Part b)

In this case, Eagle corporation is accrual basis taxpayer and Troy is cash basis tax payer. Accural basis taxpayer should recognize revenues as soon as the relevant services have been performed. Since, services were performed by Troy in the year 2020, the company should recognize income in 2020 itself irrespective of the fact that the cheque was deposited on 31st December 2020 and the company didn't add deposit to the corporation’s account until January 2021. Troy, however, will recognize the bonus in the year 2021 at the time when he actually receives the same as he continues to be a cash basis taxpayer.

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Part c)

In the give situation, Eagle corporation and Troy are both cash basis taxpayers. However, the client has clearly specified to Troy that the cheque shouldn't be deposited until January 2021. Therefore, the cheque cannot be treated as cash equivalent at the time Troy receives it and as such the company cannot recognize $10,000 as income in the year 2020 Consequently, both, Eagle Corporation and Troy will recognize income in $2021.

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Tabular Representation

	Income Recognized In Year
Situation	Eagle Corporation	Troy
a	2020	2021
b	2020	2021
c	2021	2021