Entity Cases 71. Evelyn is the president and sole shareholder of Ephron Corporat
ID: 2470009 • Letter: E
Question
Entity Cases
71. Evelyn is the president and sole shareholder of Ephron Corporation. Ephron is an accrual basis taxpayer and uses a calendar year. Evelyn is a cash basis, calendar-year taxpayer. During the second half of 2013, Ephron recorded several million dollars of sales to customers with cash payment expected in the first half of 2014. To reduce the taxable income at the corporate level, Ephron accrues a $200,000 bonus to Evelyn on December 15, 2013. As of December 15, 2013, the corporation does not have cash on hand to pay the bonus but expects to receive cash from customers in March or April 2014.
Evelyn is considering the following alternatives for the corporation’s payment of the bonus:
a. Have the corporation immediately borrow more on its commercial line of credit and pay the bonus by December 31, 2013.
b. Wait for the cash flow from customers and pay the bonus around March 1, 2014.
c. Wait to pay the bonus until around April 15, 2014.
Read and analyze the following authorities and determine when the corporation is allowed to deduct the bonus for each of the 3 payment alternatives:
Sec. 267.
Reg. Sec. 1.267(a)-1.
Explanation / Answer
The corporation is following the accrual basis of accounting.
The bonus is an expense and it can be allowed as expense in the year of accounting that is 2013.
Hence the deduction is allowable in all cases of a,b,c.
But the originality of the bonus liability is a question mark.
The disallowance under section 267(a-1) is applicable in respect of unpaid expenses and interest and it excludes bonus.
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