Question

BZD, a calendar year corporation, made the following year-end accruals for 2019 financial statement purposes: a. $73,000 expense and $73,000 liability for unpaid December salaries. BZD paid the entire liability to its employees before the end of January 2020. Determine how much of the accrued expense is deductible on BZD's 2019 federal tax return. b. $76,000 expense and $76,000 liability for the CEO's 2019 bonus. BZD paid $38,000 to the CEO on March 1, 2020, and the remaining $38,000 on May 1, 2020. BZD and the CEO are not related parties. Determine how much of the accrued expense is deductible on BZD's 2019 federal tax return. c. $237,700 expense and $237,700 liability for accumulated vacation pay. No employees took vacation between January 1 and March 15, 2020. Determine how much of the accrued expense is deductible on BZD's 2019 federal tax return.

Answer 1

Ans:

a. $73000 exp can be deducted in 2019 Federal tax Return because compensation was paid on January 2020 i.e before March 15, 2020 ( 2.5 months after year end)

b. BZD pays $38000 on March 1, 2020 i.e before March 15, 2020 (2.5 months after year end) to CEO, therefore it is deductible in 2019 Federal Tax Return because its within the 2.5 month rule.
But BZD Paid $38000  on May 1, 2020. Not eligible for 2019 (It is deductible in next year)

c. No employees took vacation between January 1 and march 15, 2020, therefore, $0 is deductible on BZD's 2019 Federal Tax return.