Broadbill Corporation a calendar year C corporation has two

Broadbill Corporation, a calendar year C corporation, has two unrelated cash method shareholders: Marcia owns 51% of the stock, and Zack owns the remaining 49%. Each shareholder is employed by the corporation at an annual salary of $240,000. During 2017, Broadbill paid each shareholder-employee $220,000 of his or her annual salary, with the remaining $20,000 paid in January 2018. How much of the 2017 salaries for Marcia and Zack is deductible by Broadbill in 2017?

a. For a cash method taxpayer, the amount of the 2017 salaries that is deductible in 2017 is $.

b. For an accrual method taxpayer, in 2017, Broadbill can deduct $.

Solution

Answer:

a. Under the cash method of accounting, the salaries are deductible when they are paid. Thus, Broadbill deducts $220,000 x 2 = $440,000, the salaries amount paid by the corporation in 2017.The $40,000 of salaries paid by Broadbill in 2018 is deductible by the corporation in 2017.

b. An accrual method of corporation cannot claim deduction for accrual with respect to related party. Instead, the deduction is defereed till the recipient reports the amount as income. Thus, Broadbill deducts $220,000 salary paid to Marcia + $240,000 salary paid to Zack = $460,000. The $20,000 of Marcia\'s 2017 is accrued by Broadbill on December 31, 2017 is deductible by the corporation in 2018