tax questions and issues

4-5 sentences or 7-10 lines mix 

of oral & written facts

Group tax questions separately 

from tax issue

Backgroundfor Tax Research Project-

Written Facts

February 6, 2020

Due April 2, 2020 (Draft due March 19, 2020)

Michael, your friend from ASU is started his new job at XCite Biotechnology, Inc in November, 2019. He called you on a quick matter. His company is a new company backed by several angel investors. They have just a small number of full time employees and four principals or owners. It is off to a great start and one of their medical devices is in an FDA trial in the early stage. The company is considered successful based on recent early stage trials and FDA discussions about their line-up of medical device products. There are also discussions and interest with biotech venture capital firms about their medical device products.

Michael is the financial accountant, tax accountant and IT person; (or all around get it done person) and he and the office manager do everything else not done by the primary principals and the corporate development person. Michael is scheduled to be paid $55,000 of gross pay per year that translates to $2115.38 of gross pay per payroll period over 26 pay periods. The office manager has only been there couple of months before Michael joined. The office manager makes a little more than Michael. Both are also scheduled to receive a year-end bonus of $10,000. This is the target amount of bonuses. In other words, the bonus amounts for Michael and Office Manager could be zero to $20,000. He also understands that the principals who are owner-employees earn 0,000 per year and can make up to $200,000 of bonus and the business and corporate development executive can earn up to $100,000 of bonus. All other individuals at the company work for an outside engineering and technology contracting firm and are not employees of XCite Biotechnology, Inc.

The employees and owners will not know the final bonus until after year end when the financial statements are complete and the March board meeting is conducted. He understands it takes about 2 months to 2 and ½ months to get this effort complete and checks issued to employees and owners for their bonuses if any. Furthermore, the Company has some significant Q1 cash requirements that may prevent it from paying bonuses.

Being the astute person, Michael asks the office manager about his bonus and the other bonuses: “Have they accrued any bonuses for financial statement purposes for yearend of December 31,”? “Since we are expecting to have revenues next year and potential taxable income, has anyone looked into the timing of the deductibility of the bonuses” for 2019?

They also have a 401(k) profit sharing plan. The employees and owners have made employee deferrals into the 401(k) and the company plans to match the employee contributions in February 2020 for those employees who are employed on December 31, 2019. Further, the company is scheduled to make a discretionary profit sharing contribution for 2019. 401(k) profit sharing plan that allows an employee to defer up to 15% of the W-2 Compensation of employees including owner employees. The deferrals are matched at 50% of the deferral up to 10% of the employee’s compensation. The matching contribution will be only made if you are employed on the last day of the year. The Board is looking to make a profit- sharing contribution to all employees equal to 2% to 5% of compensation depending on the final financial numbers and cash position. The profit sharing contribution will be determined at the Board meeting in March, 2020.

Michael asked the same question to the office manager as he did about the bonuses- Have we accrued matching contribution and anything for the profit sharing contribution to the 401(k) profit sharing plan? What about the deductibility of the matching and profit sharing contributions for tax purposes in 2019?

Michael called you at your new job at the CPA firm and basically asked the same questions of you. He also asked about extending the tax return because it was unlikely he will get the corporate tax return complete by April 15, 2020. “Can we extend our 2019 corporate tax return?” Your response is “Sure”- “You can extend the due date of your tax return beyond April 15, but you cannot extend the tax payments that are due for the corporation.” The other questions or issues on deductibility of bonuses and employee and employer contributions to the 401(k) I will need to look into them.

You talk to the person next to you at the office: what do you think? Your friend at the office says: “You better go check with the Coordinating or Tax Partner; because I worked on a question for that company. We do work for them; maybe you can have a chance to charge your time. “

Stop for now.