Accrued taxes: new IRS advice may accelerate payroll tax deductions.

• Author: Josephs, Stuart R.
• Position: Federaltax

IRS Field Attorney Advice 20061701F, (April 28, 2006), which may not be used or cited as precedent, considered whether accrual basis taxpayers can deduct employment taxes on vacation/bonus pay accrued at year-end, but not paid until the next year.

Facts

An accrual method taxpayer currently deducts payroll taxes on year-end accrued vacation and bonus pay in the year before these taxes or the related compensation are paid.

Conclusion

Accrual method taxpayers may be allowed to deduct employment taxes on vacation/bonus pay accrued at year-end but not paid until the subsequent year. But these taxpayers must satisfy IRC Sec. 461(h)(3) and Regs. Sec. 1.461-1(a)(2)(i).

Discussion

Under the accrual method, a liability is incurred and is generally taken into account in the year in which: 1) all the events have occurred, establishing the fact of the liability; 2) the amount of the liability can be determined with reasonable accuracy; and 3) economic performance has occurred with respect to the liability [Regs. Sec. 1.461-1(a)(2)(i)]. Combined, the first two requirements are called the "all events test" [Sec. 461(h)(4)].

Sec. 461(h)(1) provides that, in determining whether an amount has been incurred with respect to any item during any tax year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs. Regs. Sec. 1.461-4(g)(6) provides that economic performance occurs as a tax is paid to the governmental authority that imposed it.

Sec. 461(h)(3) and Regs. Sec. 1.461-5 provide the recurring item exception to the economic performance rule. Under this exception, a liability is treated as incurred for a year if:

1) At year-end, all events have occurred establishing the fact of the liability and the amount can be determined with reasonable accuracy;

2) Economic performance occurs on or before the earlier of (a) when the taxpayer timely files a return or (b) the 15th day of the ninth calendar month after the year-end;

3) The liability is recurring in nature and the taxpayer consistently treats the item as incurred in years where the all events test is met; and

4) Either the liability's amount is not material or the liability's accrual in the earlier year results in better matching of the liability against the related income. In the case of a tax liability, this matching requirement is deemed satisfied [Regs. Sec. 1.461-5(b)(5)(ii)].

Under Rev. Rul. 69-587 and Eastman Kodak [209 Ct.Cl. 365...