Axis Corp. is an accrual-basis calendar-year corporation. On December 13, 2012, the Board of Directors declared a 2%of profits bonus to all employees for services rendered during 2012 and notified them in writing. None of the employees own stock in Axis. The amount represents reasonable compensation for services rendered and was paid on March 13, 2013. Axis’ bonus expense may
a. Not be deducted on Axis’ 2012 tax return because the per share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus.
b. Be deducted on Axis’ 2012 tax return.
c. Be deducted on Axis’ 2013 tax return.
d. Not be deducted on Axis’ tax return because payment is a disguised dividend.
Answer:B
The requirement is to determine the correct statement regarding Axis Corp.’s deduction for its employees bonus expense. An accrual-method taxpayer can deduct compensation (including a bonus) when there is an obligation to make payment, the services have been performed, and the amount can be determined with reasonable accuracy. It is not required that the exact amount of compensation be determined during the taxable year. As long as the computation is known and the liability is fixed, accrual is proper even though the profits upon which the compensation are based are not determined until after the end of the year.
Although compensation is generally deductible only for the year in which the compensation is paid, an exception is made for accrual method taxpayers so long as payment is made within 2 1/2 months after the end of the year. Here, since the services were performed, the method of computation was known, the amount was reasonable, and payment was made by March 15, 2013, the bonus expense may be deducted on Axis Corp.’s 2012 tax return. Note that the bonus could not be a disguised dividend because none of the employees were Shareholders.