In 2020, accrual basis Paint Corp agreed with cash basis Office Company to paint their office building, based on an hourly rate.  Paint Corp performed the painting services in 2020, which Office Company was very happy with.  A $10,000 bill was sent in November of 2020, which was paid by Office Company in December of 2020.

In December of 2021, Paint Corp. realized that there was a clerical error.  The $10,000 bill should have been only $1,000 and informed Office company that they would be paid a $9,000 refund.  

In January of 2022, Paint Corp hand delivered the $9,000 check to Office Company.

Assume that tax rates are 10% in 2020, but skyrocket to 50% in 2021 and 2022.  As the tax advisor to both companies, how would you legally minimize the tax liability for both Paint Corp?  

BRIEFLY explain tax ramifications to Paint Corp (Accrual basis) in each year

BRIEFLY explain tax ramifications to Office Company (Cash Basis) in each year

Answer rating: 100% (QA)

Tax Ramifications for Paint Corp Accrual Basis Year 2020 Accrual basis taxpayers recognize income wh... View the full answer