Accounting for bonus compensation under the final corporate estimated tax regs.

• Author: Hecimovich, Gary L.

On August 7, 2007, Treasury issued final corporate estimated tax regulations under Sec. 6655, effective for tax years beginning after September 6, 2007 (TD 9347). These final regulations significantly modify the prior proposed regulations (REG-107722-00) and establish a comprehensive set of rules for corporations using the annualized income installment method. Although the annualization method is intended as a safe harbor for computing quarterly installments, in practice the new regulations leave some questions unanswered, casting uncertainty on how "safe" the safe harbor is. Ambiguities in the final regulations will require practitioners to work closely with their clients to develop supportable positions for estimated tax returns computed under the annualized income installment method. An example of this ambiguity is provided below in the context of accounting for bonus compensation deductions.

Special Rule: Reasonably Accurate Allocations

The final regulations contain several special rules that apply to specific deductions that Treasury and the IRS believed could result in significant distortions in the estimate of annualized taxable income. One of these special rules is provided in Regs. Sec. 1.6655-2(f)(2).This rule requires that specific items of deduction that are routinely incurred on an annual basis, or for which a special exception to general accounting rules exists, must be allocated throughout the tax year in a "reasonably accurate manner," regardless of the annualization period paid or incurred or otherwise properly taken into account. The items of deduction identified for this special treatment are:

* Real property taxes;

* Employee and independent contractor bonus compensation, including the employer's share of related employment taxes;

* Deductions under Sec. 404 (deferred compensation) and contributions to welfare benefit funds under Sec. 419 (i.e., VEBA contributions);

* Items allowed as a deduction for the tax year by reason of (1) Sec. 170 (a)(2) and Regs. Sec. 1.170A-11 (b)(certain accrued charitable contributions), (2) Regs. Sec. 1.461-5 (recurring-item exception), or (3) Regs. Sec. 1.263(a)-4(f) (12-month rule); and

* Other deductions designated by Treasury in future guidance.

The regulations define "reasonably accurate manner" as "allocated ratably throughout the taxable year." Alternatively, a nonratable allocation will be considered to be made in a reasonably accurate manner if it provides a reasonably accurate...