I don't understand the answer to the following question and would really appreciate some clarification:
Axis Corp. is an accrual basis calendar year corporation.
On December 13, 2012, the Board of Directors declared a two percent 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.
The correct answer is : B. Be deducted on Axis' 2012 tax return.
And the reason why is:
While cash based taxpayers deduct deferred compensation in the tax year that the compensation is actually paid to employees, accrual basis taxpayers deduct deferred compensation in the tax year that the liability to pay the compensation becomes fixed. The liability to pay the deferred compensation becomes fixed when:
1) all events have occurred to establish the liability to pay the compensation;
2) economic performance has occurred with respect to the liability; and
3) the amount can be determined with reasonable accuracy. In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.
This response correctly indicates that Axis' bonus expense would be deducted on the corporation's 2012. All the events occurred to establish the liability for the bonuses when the corporation declared the dividends and notified the employees. The bonuses are for services rendered in 2012, indicating that economic performance has occurred with respect to the liability, and the amount of the bonuses can be determined with reasonable accuracy. Paying the dividends on March 13, 2013 is within the first 2 1/2 months of the close of Axis' 2012 tax year. Hence, the liability to pay the dividends became fixed in 2012 and they were paid within the first 2 1/2 months of the 2013 tax year.
I think the answer should be that it can be deducted on the 2013 tax return. I don't understand how March 13,2013 is within 2 1/2 months of the end of the 2012 tax year. I think that the cutoff for the 2 1/2 months would be February 15, 2013 and March is clearly after that.
Can anyone help explain this?
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