Discussion:Cash Basis Taxpayer--profit sharing contribution...

Here's the deal--if a cash basis taxpayer accrues profit sharing expense (but doesn't actually pay it until the following tax year) can it take it on the current year tax return. I did see a related thread regarding the accrual of payroll taxes that weren't paid the following year. On first glance I would say no--cash basis means you take the ded wonuction when it is actually paid--but I was wondering if profit sharing contributions were an exception.

A deduction may be taken for contributions to a qualified plan only when contributions are actually paid. Payment for this purpose means the contributions must be delivered to the plan's funding medium (usually a trust). Accrual of a contribution obligation on the employer's books is not sufficient. The IRS has ruled that a deposit in escrow does not qualify. Actual payment is needed before the end of the taxable year for which the deduction is taken, unless payment is made during the grace period described below.

89 Rev. Rul. 55-310, 1955-1 C.B. 45.   
  

Both accrual method and cash method taxpayers have a grace period to make contributions for the taxable year. A payment is deemed made in the preceding taxable year if it is "on account of" such preceding year and it is made before the due date (including extensions) for filing the employer's federal income tax return for the year. Operationally, two requirements must be met for a payment to be treated as being on account of the preceding year:     

(1) the plan's terms must allow the payment to be treated as made for the preceding year; and    

(2) the employer either must designate the payment, in writing, to the plan administrator or trustee, as applying toward the previous year or must actually deduct the payment on its tax return for the previous year. Such a designation, once made, is irrevocable.

IRC 404(a)(6)

(6) Time when contributions deemed made. For purposes of paragraphs (1) , (2) , and (3) , a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

I believe paragraph (3) deals with profit-sharing plans.