North Inc. is a calendar-year, accrual-basis taxpayer. At the end of year 1, Nor
ID: 2359080 • Letter: N
Question
North Inc. is a calendar-year, accrual-basis taxpayer. At the end of year 1, North accrued and deducted the following bonuses for certain employees for financial accounting purposes. *$7,500 for Lisa Tanaka, a 30 percent shareholder *$10,000 for Jared zbaski, a 35 persent shareholder *$12,500 for Helen Talanian, a 20 percent shareholder *$5,000 for Steve Nielson, a 0 percent shareholder Unless stated otherwise, assume these shareholders are unrelated. How much of the accured bonuses can North Inc. deduct in year 1 under the following alternative scenarios? A. North paid the bounses to the employees on March 1 of year 2. deductible Accrued bonuses__ B. North paid the bounses to the employees on April 1 of year 2. C. North paid the bonuses to employees on March 1 of year 2 and Lisa and jared are realted to each other, so they are treated as owning each others stock in north. D. North paid the bonuses to employees on mMarch 1 of year 2and Lisa and Helen are related to each other, so they are treates as owning each others stock in North.Explanation / Answer
North Inc. is a calendar-year, accrual-basis taxpayer. At the end of year 1, North accrued and deducted the following bonuses for certain employees for financial accounting purposes. *$7,500 for Lisa Tanaka, a 30 percent shareholder *$10,000 for Jared zbaski, a 35 persent shareholder *$12,500 for Helen Talanian, a 20 percent shareholder *$5,000 for Steve Nielson, a 0 percent shareholder Unless stated otherwise, assume these shareholders are unrelated. How much of the accured bonuses can North Inc. deduct in year 1 under the following alternative scenarios? A. North paid the bounses to the employees on March 1 of year 2. deductible Accrued bonuses__ B. North paid the bounses to the employees on April 1 of year 2. C. North paid the bonuses to employees on March 1 of year 2 and Lisa and jared are realted to each other, so they are treated as owning each others stock in north. D. North paid the bonuses to employees on mMarch 1 of year 2and Lisa and Helen are related to each other, so they are treates as owning each others stock in North.
North may deduct $35,000 in year 1 because they were paid within 2 months of year end.
Employee Deductible Year 1 Deductible Year 2
Lisa Tanaka $7,500
Jared Zabaski $10,000
Helen Talanian $12,500
Steve Nielson $5,000 $35,000
b. North may not deduct any of the bonus in year 1 because the bonuses were not paid within 2 months of year end. It may deduct the $35,000 of bonuses in year
2. Employee Deductible Year 1 Deductible Year 2
Lisa Tanaka $7,500
Jared Zabaski $10,000
Helen Talanian $12,500
Steve Nielson $5,000
$35,000
c. North may deduct $17,500 in both year 1 and year 2.
Helen and Steves bonuses are deductible in year 1 because they were paid within 2 months of year end. Lisa and Jareds bonuses are deductible in year 2 which is the year they take the bonuses into incomesince they are related parties (own greater than 50 percent).
Employee Deductible Year 1 Deductible Year 2
Lisa Tanaka $7,500
Jared Zabaski $10,000
Helen Talanian $12,500
Steve Nielson $5,000
$17,500 $17,500
d North may deduct $35,000 in year 1. All of the shareholders bonuses are deductible in year 1 because they were paid within 2 months of year end.
Helen and Lisa are not considered to be related parties because together they own 50 percent but not more than 50 percent of North..
Employee Deductible Year 1 Deductible Year 2
Lisa Tanaka $7,500
Jared Zabaski $10,000
Helen Talanian $12,500
Steve Nielson $5,000
=$35,000
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