Discussion:Accrued vacation limited to what was accrued at year end?
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Discussion Forum Index --> Tax Questions --> Accrued vacation limited to what was accrued at year end?
| 10 May 2008 | |
| I have an accrual basis partnership client who paid more within the 2 1/2 month period than what was accrued at the end of the tax year 12.31.07. Is the deduction limited to what was accrued? One concern is that part of the vacation is for 2008 compensation expense; on the other hand, the accrual at year end was merely an estimate. Thanks. | |
| 10 May 2008 | |
| The 2007 deduction for the 12/31/07 accrued wages is the amount that the company was legally liable for as of the end of 2007.
So, I think you have to stick with the lower amount that had been accrued and deduct the rest in 2008, unless you can show some sort of error in the calculation original amount. | |
RoyDaleOne (talk|edits) said: | 10 May 2008 |
| Estimates are not allowed:
Sec. 404 (a)(5) (5) OTHER PLANS If the plan is not one included in paragraph (1), (2), or (3), in the
taxable year in which an amount attributable to the contribution is
includible in the gross income of employees participating in the
plan, but, in the case of a plan in which more than one employee
participates only if separate accounts are maintained for each
employee. For purposes of this section, any vacation pay which is
treated as deferred compensation shall be deductible for the taxable
year of the employer in which paid to the employee.
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| 10 May 2008 | |
| I agree with Roy, accrued vacation pay is not deductible. Sounds to me that if you were underaccrued for 2007, then your M-1 adjustment was too low & the client got a deduction he shouldn't have. Presuming that the 1065 has already been filed, I would have your client come up with an accurate calculation for 2008 and bring the books up to date for the current year. | |
Actionbsns (talk|edits) said: | 10 May 2008 |
| I'm not clear on the accrued vacation being discussed here. Are you talking about the accrued vacation time earned by employees being taken as a deduction at year end as in accrued payroll? And is it included on the W-2? Section 404 talks about qualifed deferred comp and pension plans etc., but unless there is collective bargaining where monies go into some type of trust fund, I've never seen vacation pay treated like this. I've certainly never seen it done, but it may explain the whacky looking accrued payroll number on a tax return I worked on this year. I couldn't see where the prior CPA came close to getting the number he used last year. But this wasn't a union shop either. | |
RoyDaleOne (talk|edits) said: | 10 May 2008 |
| Sec. 461
Section 97 of Pub. L. 85-866, as amended by Pub. L. 86-496, Section 2, June 8, 1960, 74 Stat. 164; Pub. L. 88-153, Oct. 17, 1963, 77 Stat. 272; Pub. L. 88-554, Section 1, Aug. 31, 1964, 78 Stat. 761; Pub. L. 89-692, Oct. 15, 1966, 80 Stat. 1025; Pub. L. 91-172, title IX, Section 903, Dec. 30, 1969, 83 Stat. 711; Pub. L. 92-580, Section 3, Oct. 27, 1972, 86 Stat. 1276, provided that deductions for accrued vacation pay under this section would not be denied for any taxable year ending before Jan. 1, 1973, so long as the employee at the time of accrual of pay has performed the necessary qualifying service under an appropriate plan. (a) GENERAL RULE If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under this chapter; but, if they would otherwise be deductible, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year: IRS Quote: "For vacation pay to be deductible under IRC section 461, it must meet the All Events Test as well as the Economic Performance Test. For instance, for a company to deduct accrued vacation pay, economic performance must be established by: (1) the employees providing the services and (2) a liability must be established meaning the employee should be vested in the plan. If an employee does not meet the vesting requirements, no accrual may be deducted." Note the reference is to one employee, therefore, an account must be maintained for each employee. | |
| 10 May 2008 | |
| Accrued vacation is typically deducted on the books and shown as a liability for GAAP purposes. It is one of those items like reserve for bad debt or deferred taxes - not deductible until the economic event actually happens, in this case, when paid. So, you have a deduction on the books that gets backed out of the tax return via Sch M-1. What do you do when you have an underaccrual? You make up for it next year.
This is why I like to carry a cushion (for the balance sheet, not my butt), because this is not a high profile item and I would be shocked to find an IRS auditor or banker who understands it. | |
| 10 May 2008 | |
| Thank you so much for all your helpful responses and insight. The return has been extended, and I was going to go with the lower but wasn't sure if this were a proper treatment. Now I have a better understanding of this subject with your great help. Best regards to all! | |
