Gerald, a cash basis taxpayer, owns 70% of the stock of Black Corporation, a calendar year, accrual basis C corporation. On December 31, 2017, Black accrued a bonus of $80,000 to Gerald, and paid the bonus to Gerald on January 5, 2018 . When does Gerald report the bonus, and when does Black Corporation deduct the bonus? Would your answers change if Gerald was a 40% shareholder of Black?
Gerald is a more than 50% shareholder of Black Corporation; thus, the taxpayers are related parties under § 267 . Gerald, a cash basis taxpayer, reports the salary income in 2018, the year of receipt. Under § 267, Black Corporation, an accrual basis taxpayer, cannot deduct the salary expense when accrued in 2017 . Instead, Black's deduction for the bonus is in 2018, the year Gerald reports the salary as income.
If Gerald were a 40% shareholder, the § 267 related party rules would not apply to the bonus deduction. Instead, Black Corporation, an accrual basis taxpayer, deducts the bonus in 2017, the year of accrual. Gerald, a cash basis taxpayer, still reports the bonus as income in 2018, the year of receipt.
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