Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2018, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2018, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2019, compute Ivory Corporation's 2018 deduction for the above amounts.
A) $250,000
B) $225,000
C) $200,000
D) $125,000
E) None of above

Question

Quizplus · Accepted Answer

The salaries paid to the shareholders are deductible operating expenses, and so Ivory Corporation can deduct $100,000 for Craig and $100,000 for Oscar, for a total of $200,000. However, because the shareholders own more than 50% of the corporation, the salaries must be reasonable and ordinary in amount. Assuming the salaries are reasonable, they can be fully deducted.

The bonuses accrued on December 31, 2018, are not deductible until paid, unless they meet the requirements for the "all events test." It is unclear from the facts whether the all events test is met, so we cannot assume a deduction for the accrued bonuses until they are paid. Ivory Corporation can deduct the bonuses on February 1, 2019, when they are paid, as long as they are reasonable and ordinary in amount.

Therefore, the deduction for 2018 is only for the salaries paid, which are $200,000. The correct answer is B) $225,000 (none of the answer choices are correct, as they all include the accrual of the bonuses).

Ivory Corporation, a Calendar Year, Accrual Method C Corporation, Has