Discussion:Cash basis adjustments

Thank you for your answer.

This is mainly an accounting question. The correct way to report payroll taxes is to record the following entries on the date the wages are paid. I also just dug out my old Accounting Principles textbook (12th Edition) and found that the authors, Niswonger and Fess, agree with me. Actually, they taught me this back in 1970.

(1) debit FICA Expense, FUTA Expense, and SUTA Expense (2) credit FICA Payable, FUTA Payable, and SUTA Payable

I'll try to find more on the web, possibly after the Pistons game.

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Besides the FICA Tax and Federal Income Tax deducted from the employees’ earnings discussed above, the employer must also pay FICA Tax equal to the amount paid by the employee, Federal Unemployment Insurance Tax (FUTA), and State Unemployment Insurance Tax (SUTA). These three taxes on salaries paid by the employer are considered operating expenses. The journal entry results in a debit to Payroll Tax Expense and credits to FICA Tax Payable, FUTA Payable, and SUTA Payable.

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>>>>>>> See Publication 535, page 23, Employment Taxes, be sure to read the example, third paragraph down from the "Employment Taxes" title. This is so simple that the IRS didn't think it was necessary to state that this applies in December, when the payroll taxes will be paid in January.

I'm done for now with this subject. I've been doing it this way for 26 years. I suspect that most accountants do it this way. I'm not sure how some CPAs' clerks handle it, though.

Regarding FUTA, when the SUTA tax is paid late, the IRS will bill the taxpayer for the additional FUTA owed. I would then expense the additional FUTA in the year it was paid. But this was not the question in this discussion, and neither are the following: whether or not Tax Mama is right or wrong on sales taxes, whether unpaid interest can be deducted on an auto loan, distinctions between personal and business credit cards, and how FICA and FUTA can be paid. None of these topics have anything to do with the original question.

See Reg. 1.461-1(a)(1) which talks about the cash basis of accounting and when an expense can be deducted. We are not talking about the combined (hybrid) method which combines both the cash and accrual method. If you were than I would agree with you but the original question concerned cash basis. I have not yet read anything above that has been authoritative to the contrary.

In the end we may very well agree to disagree but to issue f/s on the cash basis method and deduct er p/r taxes before they are paid is incorrect. This would be a M-1 adjustment as I see it if you were to take this unpaid expense on your tax return. A sole properitor does not have an M-1 on their Schedule C but that does not change the theory. There is also the issue of materiality where the IRS is concerned and also consistency in how items are reported but for now, I am not changing my position. I look forward to additional discussion on this topic.

Death & Taxes Inc has a 940 tax due of $127: 2 employees at $56 and one at $15. It will appear on the Other Current Liabilites line 18. Last year it was $129.

Dennis - You might be correct, but I didn't notice anything on that page that said it is discussing Examination of Returns for only "full accrual basis" taxpayers.

My point is that the IRS allows cash basis taxpayers to deduct payroll taxes in the year accrued, instead of deducting them in the year paid, as long as the taxpayer is consistent in the method he chooses when the payroll is started. The IRS also allows deductions for cash basis taxpayers for SEP contributions and credit card purchases when accrued and not when actually paid.

JD, Michael, and Dennis - So, can I assume that you record SEP contributions in 2007, when paid in 2007 by cash basis employers for 2006?

This same corporation contributes to the two owners' SEP plans. I make entries to deduct those SEP contibutions in the prior year, even when the contributions will be paid between January and March 15th.

Next....!

I will limit my discussion to the employer p/r taxes as in my mind that was what the original discussion was all about.

Deback, you are correct - reg 1.461-1(a)(1) does not specifically discuss employer p/r taxes. What it discusses it the timing of when deductions are allowed for a cash basis t/p.

Also, your site of pub 535 (page 23) it talks about the deduction of unemployment fund taxes and that the t/p can deduct these payments. This part is not in question - it is an operating expense and certainly a deductible expense - what is in question is the timing of that deduction which we do appear to have a difference of opinion.

From a theoritical stand point, to match income with expenses within the same period makes perfect sence. Unfortunately, the internal revenue code can limit this matching concept when it may hurt a t/p most.

D&T - The trust fund portion (which is not even able to be obsolved in bankruptcy as we all know) of the employee p/r taxes would be shown as a current liability on the cash basis f/s (and I tend to use income tax basis of accounting for f/s reporting with no notes) that I would issue and it would be those same f/s that would and do get reviewed in the peer review which I have always passed with flying colors.

Deback - if the IRS preferred for cash basis t/p's to deduct er p/r taxes before they were actually paid - I very much doubt it would be one of those best kept secrets and the CPA community would certainly know about it. During our years of training by the "partners" they would not have had to write so many silly review comments over and over on this very issue.

I for one do not want to make this or any other subject on this board a CPA versus non CPA issue. We are all here to help each other and learn and assist those newer to the profession with answers to their questions. Heck, I have only been in public accounting 23 years so I still have lots to learn. We are all each others peers with sincere intentions and health opinions.

Unfortunately, at this point based on all that I know and have read - on a true cash basis method of accounting - employer p/r taxes are not a tax deduction until paid.

The employer becomes liable for ALL of them as of the date of the p/r! THESE ARE A CURRENT LIABILITY!

The employer becomes liable for BOTH the EE tax w/h and the ER tax due on the p/r.

Many computer programs and o/s p/r services compute them as of the p/r date. However, we may book them on a monthly or quarterly basis even though it is a current liability as of the p/r date.

Cash basis books must pick up the CURRENT LIABILITY and expense, even if it's not paid during the period.

Cash basis books would not however pick up a p/r that started 12/26 and paid 1/2 of the following year. That would be an accrual adj. That would be considered a Jan p/r for the cash basis.

This is not a discussion about cc purchases. However, the same idea is true. If you may purchases in Dec and the cc is not paid until Jan, the Dec purchases are considered a current liability. dr. expenses cr. cc payable It is the recording of a current liability, not an accrual. You become liable for the payment when the purchase is made.

"A cash basis employer deducts (as ordinary and necessary business expenses) taxes withheld from an employee's compensation in the taxable year in which the taxes are withheld. The fact that the taxes withheld (i.e., the taxes on the employees) are not actually paid to or deposited with IRS until the following tax year does not change this result.

However, Social Security and unemployment taxes imposed on the employer for compensation paid to employees are not deductible by a cash basis employer until actually paid to the government"

I can't find consenus on this question from other online posting boards among tax pros.

Looks like this is incorrect based on:

Rev. Rul. 80-164

INCOME TAX WITHHOLDING, FICA, AND FUTA; WHEN DEDUCTIBLE

                           Published: June 23, 1980

26 CFR 1.461-1: General rule for taxable year of deduction

(Also Section 162; 1.162-1.)

 Income tax withholding, FICA, and FUTA; when deductible. An employer who uses the cash receipts and disbursements method of accounting should deduct, under section 162 of the Code, as wages paid, federal taxes withheld from employees' wages in the year such taxes are withheld. FICA and FUTA taxes imposed on the employer are deductible in the year paid to the U.S.

Here's the link:

http://www.taxlinks.com/rulings/1980/revrul80-164.htm

If this is the case, this would bring about a tax planning issue for clients to pre-pay their 12/31 payroll liabilities on 12/31 instead of depositing the following month for monthly depositors.

Any thoughts?

See James W. Tippin; 104 TC 518:

We now turn to the third issue, which concerns the deductibility of the FUTA taxes and of the employer's portion of the FICA taxes. Secs. 3301, 3111. Petitioner incurred liability for these taxes with respect to wages paid to the employees of his law practice. On Schedule C of their tax returns, petitioners deducted these taxes for the year in which the liability accrued (i.e., the year in which the wages were paid), even though petitioner did not pay the tax until a later year. Petitioners argue that this treatment was proper and was in compliance with section 1.461-1(a)(1) and (3), Income Tax Regs. We disagree. Section 1.461-1(a)(1), Income Tax Regs., provides deductions for depreciation, amortization, depletion, and losses under sections 167, 611, and 165. Nothing in section 1.461-1(a)(3), Income Tax Regs., allows a cash basis taxpayer to deduct a tax before the year of payment. See also Rev. Rul. 74-70, 1974-1 C.B. 116 (for cash basis taxpayers, FICA and FUTA taxes are deductible for the tax year in which they are paid). Accordingly, petitioners may not deduct either the FUTA taxes or petitioner's share of FICA taxes until the year in which he paid such taxes.

And I remember reading/hearing in a seminar(long long ago, in a galaxy far far away), that as long as the taxpayer is consistent in the approach, the IRS accepts the accrual of payroll taxes for cash basis taxpayers. Wish I had something more concrete.

Unless I'm halucinating...it's always a possibility during March.

And wouldn't be the first thing I've found on this forum that proved the prior way of doing it where I used to work was incorrect.