Discussion:Payroll accrual

Where do you see that the bonuses can be accrued as long as they are paid within 2.5 months after the end of the year?

Our client deducted the accrued bonus and accrued salary/wages. It is an accrual basis C-Corp. I spoke to someone at the IRS, and she told me that she did not see anything that said either yes or no to accruing regular salaries and wages other than bonuses.

I got that the bonuses can be accrued as long as they are paid within 2.5 months after year-end from the internet. It is a legal alert dated 12/4/2009 from Sutherland Asbill & Brennan, LLP. This article states the following:

Under most circumstances, compensation deductions are permitted on a cash basis only - the deduction is taken in the year the compensation is actually paid. One exception to this general rule is that Internal Revenue Code Section 461 and 404(a) and the related regulations allow a company using the accrual method of accounting to take a deduction for bonuses for the year in which the company incurs a fixed and determinable liability for bonus payments, even though the bonuses are not paid until the first 2 1/2 months following the year in which the liability is incurred.

Sorry, I thought I was on Jeopardy!

What about the recurring item exception. IRC 461(h(3), Reg. 1.461-5.

Smscpa20, I agree with what you have on accrued vacation pay and bonuses with regard to the 2.5 month rule. However, none of these rules apply to shareholder that owns greater than 50% (controlling shareholders). Under 267(a)(2), the corporation is put on the cash basis with respect to deductions for compensation to controlling shareholders.

Just to add some detail to 267(a). The moment for recognizing the expense on the accrual basis(of, in this case, the corporation) and the moment for recognizing the income on the cash basis (by, in this case, the shareholder) of related taxpayers are the same moment in time; and that moment is the point in time the income is recognized. This is 267(a)(2).

PLR 8630059 factors in the concept of constructive receipt. In the case of the PLR, it relies on Reg 1.451-2(a) and Rev Rul 72-317 to support the notion that the stockholder had constructively received the bonus on the last day of the corporate tax year. In the case of PLR 8630059 the shareholder (and his wife) owned all the stock, there was sufficient $$$ in the corporate bank account to pay the bonus, and the bonus was considered to be properly authorized, earned, and payable on the last day of the corporate year.

This is the reason why you can't find anything that speaks directly to wages paid to regular employees. Each company may have adopted any variation of allowable methods. Not to mention the unallowable methods. What you should do is figure out what method your entity is on and continue with that method. A change in an accounting method is something you don't want to do haphazardly. Most companies (accrual based taxpayers) deduct accrued wages to regular employees (unrelated taxpayers) under the recurring item exception. Keep in mind that is an adopted method. However, there are no rules that say a taxpayer has to treat wages this way.

Smscpa20: Does Section 267(a)(2) apply to your client's accruals?

GregH: Does Section 267(a)(2) apply to your client's accruals?