Olive, Inc

Essay

Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, each shareholder lends Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. Olive pays the $3,000 to each shareholder early next year. From a timing perspective, when should Olive deduct this
$6,000 and when should Maurice and Alex include the $3,000 in gross income?