Gerald, a cash basis taxpayer, owns 70% of the stock of Black Corporation, a calendar year, accrual basis C corporation. On December 31, 2019, Black accrued a bonus of $80,000 to Gerald, and paid the bonus to Gerald on January 2, 2020. 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?
What will be an ideal response?
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 2020, the year of receipt. Under § 267, Black Corporation, an accrual basis taxpayer, cannot deduct the salary expense when accrued in 2019. Instead, Black’s deduction for the bonus is in 2020, 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 2019, the year of accrual. Gerald, a cash basis taxpayer, still reports the bonus as income in 2020, the year of receipt.
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