On December 31, 2017, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?
a. In 2017, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2018.
b. In 2018, if payment was made at any time during that year.
c. In 2017, if payment was made on or before April 15, 2018.
d. In 2018, but only if payment was made on or before April 15, 2018.
e. None of the above.
b
RATIONALE: Because Charles is a related party (i.e., more than 50% shareholder). Peregrine's deduction for the bonus must wait until Charles includes the bonus in gross income. Charles, who is a cash basis, calendar year taxpayer, will include the payment in gross income in the year he receives it from Peregrine. Therefore, if Peregrine pays Charles the bonus anytime in 2018, the corporation can deduct the bonus in 2018.
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