Question

Fresh Gardens Company has an annual policy to pay holiday bonuses to employees (cash basis taxpayers). Fresh Gardens Company is short of cash in December due to a business issue. If the company pays bonuses in January, what year do employees recognize income?

A. In 2020 because it was constructively received

B. In 2021 because it will be actually received

C. Either year because it is a taxpayer option

D. Neither year because the bonus is no longer ordinary and reasonable

Answer 1

A cash basis taxpayer is a taxpayer who pay taxes on income when the cash is actually paid or received. Since, the employees received cash for the bonus during January of the next year , they will be recognized by the cash basis taxpayers on the year they received. Hence, the correct answer is Option B - In 2021 because it will be actually received.

Option A is incorrect as cash basis taxpayers recognize income when they receive it and not when they are constructively received.

Option C is incorrect as it cannot be either year but rather the year when they are actually received or paid.

Option D is incorrect as bonus is recognizeable because they have been actually received in January.

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