Freda is a cash basis taxpayer. In 2015, she negotiated her salary for 2016. Her
ID: 2459168 • Letter: F
Question
Freda is a cash basis taxpayer. In 2015, she negotiated her salary for 2016. Her employee offered to pay her $21,000 per month in 2016 for a total of $252,000. Freda countered that she would accept $10,000 each month for 12 months in 2016 and the remaining $132,000 in January 2017.The employer accepted Freda’s terms for 2016 and 2017
Did Freda actually or constructively receive $252,000 in 2016?
What could explain Freda’s willingness to spread her salary over a longer period of time?
In December 2016, after Freda had earned the right to collect the $132,000 in 2017, the employer offered $133,000 to Freda at the time, rather than $132,000 in January 2017. The employer wanted to make the early payment so as to deduct the expense in 2016. Freda rejected the employer’s offer. Was Freda in constructive receipt of the income in 2016? Explain.
Explanation / Answer
Answer
Freda is a cash basis taxpayer. In 2015, she negotiated her salary for 2016. Her employee offered to pay her $21,000 per month in 2016 for a total of $252,000. Freda countered that she would accept $10,000 each month for 12 months in 2016 and the remaining $132,000 in January 2017.The employer accepted Freda’s terms for 2016 and 2017
Did Freda actually or constructively receive $252,000 in 2016?
Answer No. 1
Freda is a cash basis taxpayer. Her income is calculated for 2016 as much amount she receives in cash as a salary in 2016. So Freda has not actually received $252,000 in 2016. She actually received $ 120,000 ($10,000 * 12) in 2016.
What could explain Freda’s willingness to spread her salary over a longer period of time?
Answer No. 2
Freda is a cash basis taxpayer. So If She receives salary of 2016 in 2017 for amount of $132,000 then her income of $132,000 will be taxable for year 2017 when she actually receives salary in cash instead of 2016 when it is accrued. So It will help her in reducing tax on salary income in 2016.
In December 2016, after Freda had earned the right to collect the $132,000 in 2017, the employer offered $133,000 to Freda at the time, rather than $132,000 in January 2017. The employer wanted to make the early payment so as to deduct the expense in 2016. Freda rejected the employer’s offer. Was Freda in constructive receipt of the income in 2016? Explain.
Answer No. 3
The employer accepted Freda’s terms for 2016 and 2017. Now the employer offered $133,000 to Freda In December 2016, rather than $132,000 in January 2017 because the employer wanted to make the early payment so as to deduct the expense in 2016. Freda rejected the employer’s offer.
But she is a cash basis taxpayer. Her income is taxable in year in which she receives salary in cash and There is no breach of any conditions on early payment of salary. So Freda was in constructive receipt of the income in 2016.
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