Rodney,the sole shareholder of a calendar year,accrual basis C corporation,loaned the corporation a substantial amount of money on January 1,2010.The corporation accrued $25,000 of interest expense on the loan on December 31,2010.It pays the interest to Rodney,a cash basis taxpayer,on February 1,2011.Under these facts:
A)The corporation will be allowed to deduct the interest expense in 2010 and Rodney will be required to report the interest income in 2011.
B)The corporation will be allowed to deduct the interest expense in 2011 and Rodney will be required to report the interest income in 2010.
C)The corporation will be allowed to deduct the interest expense in 2011 and Rodney will be required to report the interest income in 2011.
D)The corporation will be allowed to deduct the interest expense in 2010 and Rodney will be required to report the interest income in 2010.
E)None of the above.

Question

Quizplus · Accepted Answer

The corporation is on the accrual basis, so it can deduct the interest expense in 2010, even though it does not pay the interest until 2011. Rodney is on the cash basis, so he will report the interest income in 2011, when he receives the payment.

Rodney,the Sole Shareholder of a Calendar Year,accrual Basis C Corporation,loaned