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Old 08-26-2012, 02:07 PM   #1
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Accrued bonus payroll for cash basis at year end?

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What are the rules on accrual payroll at year end for a cash basis taxpayer?

client will have around $400K net income for 2012. We want to bonus out the officer to reduce the $400K net income to around $50K net income.

The officer also has around $150K Officer Note Receivable account which we can zero out and run through payroll.

So I am looking to accrue officer wages, FWH, SWH, SS, & Medicare if possible with a cash basis client. Then pay it out in Jan or Feb of 2013. I believe there is some exception to the cash basis rule when it comes to payroll taxes.. just like credit card transactions not being paid out until the following year but can be expensed in the year it incurred.

The client already has a profit sharing plan which will be utilized to reduce the $400K net income, but that will be paid out in 2012 not accrued.

Can someone help me on whether this is possible and if so please provide me with an example on how to reduce the $400k Net income.

Thank you
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Old 08-26-2012, 02:27 PM   #2
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If the business is accrual basis you can do this. The bonus would have to be paid within 75 days after the year end. The officer/shareholder would report the bonus in the year paid if he/she is cash basis. Be aware that there are some economic reality arguments as well as constructive reciept arguments that the government can bring up if there is an audit.
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Old 08-26-2012, 03:29 PM   #3
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If the business is accrual basis you can do this. The bonus would have to be paid within 75 days after the year end. The officer/shareholder would report the bonus in the year paid if he/she is cash basis. Be aware that there are some economic reality arguments as well as constructive reciept arguments that the government can bring up if there is an audit.
Skyhawk thanks for your response. But the Officer Note Receivable can be run through payroll to reduce the net income. This would not incur any cash reduction as the deductions from cash have already taken place. Correct?

Then any other bonus taken would be reported in the year paid out. Correct?

Thank you
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Old 08-26-2012, 05:54 PM   #4
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“What are the rules on accrual payroll at year end for a cash basis taxpayer? “---->Payroll taxes are allowed to be deducted as a cash basis expense even if they are accrued at year end. For example, a cash basis taxpayer who accrues a retirement plan contribution as of 12/31/11, extends the return and then pays it on 10/15/12? he can deduct it in 2012.



“So I am looking to accrue officer wages, FWH, SWH, SS, & Medicare if possible with a cash basis client. Then pay it out in Jan or Feb of 2013. I believe there is some exception to the cash basis rule when it comes to payroll taxes.. just like credit card transactions not being paid out until the following year but can be expensed in the year it incurred.”---->Some say for a caash basis TP, the payroll taxes are treating the taxes as if they were accrual. For example FUTA is being charged to the payroll expense account and the FUTA Payable account. However, I believe that there is NO issue. Payroll taxes are allowed to be deducted as a cash basis expense even if they are accrued at year end, I this case in 2013, NOT in 2012.
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Old 08-26-2012, 05:56 PM   #5
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“ The client already has a profit sharing plan which will be utilized to reduce the $400K net income, but that will be paid out in 2012 not accrued.”---->Then the TP can deduct retirement expenses on his 2012 corp return.
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Old 08-26-2012, 06:51 PM   #6
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“ The client already has a profit sharing plan which will be utilized to reduce the $400K net income, but that will be paid out in 2012 not accrued.”---->Then the TP can deduct retirement expenses on his 2012 corp return.
Hi Juno thanks for your information. So I guess I can deduct and accrue the payroll taxes and pay them in 2013. But what about the payroll wages? Can the officer payroll wages be accrued too?

Also I read somewhere else that the Profit Sharing plan if the taxpayer is on the cash basis can't accrue this. But you're saying this can be accrued as well for a cash basis taxpayer.. Correct?

Also then how does that work with the payroll company? I assume the W-2 will not show the accrual withholding's and that there will be a accrual difference when tying out the W-3 summary sheet to the payroll expense account. Correct?

Is there any formal literature to back up this exception to the cash basis rule?

Thank you

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Old 08-26-2012, 07:45 PM   #7
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“ So I guess I can deduct and accrue the payroll taxes and pay them in 2013.”---->As an ER, as I said previously, you can deduct the payroll taxes in 2013 when you actually pay it out ( as you said, yu pay it out in Jan or Feb of 2013). The amounts withheld from EE can remain as a liability( I guess as FICA taxes payable ) at year-end for a cash basis taxpayer. However, the ER portion of the payroll taxes cannot be deducted until paid, OK??
“But what about the payroll wages? Can the officer payroll wages be accrued too? “---->Same as above.Since you use the cash method, you must deduct your expenses for the salary, wage, or benefit payment in the year it's paid to the EEs. A corporation can’t accrue salaries/wages at year end to a more than 2% shareholder in an S-corp/ a 100% shareholder of a C-corp. As long as it is an accrual basis taxpayer, then it depends. For example, EVEN for an accrual basis C corp, only actual compensation paid within the calendar year for the majority shareholder may be deducted on the return. Any accrued compensation is not deductible. Compensation for the other shareholders and EEs may be accrued and deducted if paid within the first 2 1/2 months of the following year. ALSO, Any bonus that is accrued must have been approved by the board before year-end to even qualify for deduction. (often, bonuses relating to services performed in one year are actually paid in the following year. In such cases, the timing of an accrual basis ER’s deduction generally is governed by the 2 1/2-month rule, too). See Section 120.1(a) for more details on the 2 1/2 month rule. Accrued bonuses payable to a C Corp shareholder/employee owning 50 percent or less of the entity within two-and-one-half months of year-end are generally deductible in the year accrued (for accrual basis taxpayers).
“Also I read somewhere else that the Profit Sharing plan if the taxpayer is on the cash basis can't accrue this. But you're saying this can be accrued as well for a cash basis taxpayer.. Correct? “---->No, I don’t think so. What I Meant was that some say , “the payroll taxes, NOT employee retirement plans, are treating the taxes as if they were accrual even for a cash basis TP, However, this is not true.
“Is there any formal literature to back up this exception to the cash basis rule?”---->I guess the effect of Code Section 267(a)(2) is to require an accrual basis ER to use the cash method to report deductions on a transaction with a related cash basis employee. See http://www.irs.gov/pub/irs-pdf/p538.pdf
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Old 08-26-2012, 08:17 PM   #8
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Quote:
Originally Posted by Juno View Post
“ So I guess I can deduct and accrue the payroll taxes and pay them in 2013.”---->As an ER, as I said previously, you can deduct the payroll taxes in 2013 when you actually pay it out ( as you said, yu pay it out in Jan or Feb of 2013). The amounts withheld from EE can remain as a liability( I guess as FICA taxes payable ) at year-end for a cash basis taxpayer. However, the ER portion of the payroll taxes cannot be deducted until paid, OK??
“But what about the payroll wages? Can the officer payroll wages be accrued too? “---->Same as above.Since you use the cash method, you must deduct your expenses for the salary, wage, or benefit payment in the year it's paid to the EEs. A corporation can’t accrue salaries/wages at year end to a more than 2% shareholder in an S-corp/ a 100% shareholder of a C-corp. As long as it is an accrual basis taxpayer, then it depends. For example, EVEN for an accrual basis C corp, only actual compensation paid within the calendar year for the majority shareholder may be deducted on the return. Any accrued compensation is not deductible. Compensation for the other shareholders and EEs may be accrued and deducted if paid within the first 2 1/2 months of the following year. ALSO, Any bonus that is accrued must have been approved by the board before year-end to even qualify for deduction. (often, bonuses relating to services performed in one year are actually paid in the following year. In such cases, the timing of an accrual basis ER’s deduction generally is governed by the 2 1/2-month rule, too). See Section 120.1(a) for more details on the 2 1/2 month rule. Accrued bonuses payable to a C Corp shareholder/employee owning 50 percent or less of the entity within two-and-one-half months of year-end are generally deductible in the year accrued (for accrual basis taxpayers).
“Also I read somewhere else that the Profit Sharing plan if the taxpayer is on the cash basis can't accrue this. But you're saying this can be accrued as well for a cash basis taxpayer.. Correct? “---->No, I don’t think so. What I Meant was that some say , “the payroll taxes, NOT employee retirement plans, are treating the taxes as if they were accrual even for a cash basis TP, However, this is not true.
“Is there any formal literature to back up this exception to the cash basis rule?”---->I guess the effect of Code Section 267(a)(2) is to require an accrual basis ER to use the cash method to report deductions on a transaction with a related cash basis employee. See http://www.irs.gov/pub/irs-pdf/p538.pdf
Ok thank you... so in my case.. cash basis C Corp with ee/shareholder owing 100% of the business.. the only thing that can be accrued for the shareholder then is the FWH & SWH at year end. Is that correct?

Thank you
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Old 08-26-2012, 08:36 PM   #9
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Correct. as paid in2012.
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Old 08-26-2012, 09:21 PM   #10
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Correct. as paid in2012.
thanks..but don't you mean accrued in 2012 and paid in 2013
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Old 08-26-2012, 09:45 PM   #11
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Sorry, it is my bad, you are right.
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Old 08-27-2012, 02:14 AM   #12
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Sorry, it is my bad, you are right.
ok thank you
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Old 08-27-2012, 09:35 PM   #13
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Your original post does not mention the fact that the officer is 100% shareholder of the corporation. It is a corporation, is that correct? As stated above a 100% shareholder is a "related party" as described by section 167. An accrued bonus deducted in year 1 and paid in year 2 is an attempt to reduce the corporate tax and defer the shareholders tax on the bonus until the next year. This manipulation of the taxation, that is the deferral for a year, is would not be available to someone who is not in control of the corporation, that is the relationship based upon the 100% ownership of the stock.
The loan reduction would be a taxable event in the year paid, or accrued, by the corporation and would be includable in the officers compensation. Reducing the officers loan is not different than paying his home mortgage, or any other debt. It is taxable for income taxes and payroll taxes to the extent of the limit.
And yes, when compensation is recognized the payroll taxes are due and owing and can be accrued by an accrual basis taxpayer.
As a rule of thumb salaries credited on corporate books are taxable to an officer in the year when the officer may withdraw the compensation at will if the corporation has the funds available to pay the salaries without causing financial difficulties. Bonuses that are based on yearly sales and that are otherwise not available to an officer are taxable in the year of receipt. Given the material amounts involved the matter should be discussed with a tax professional such as a CPA or Enrolled Agent with corporate tax experience.
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Old 08-28-2012, 06:49 PM   #14
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Your original post does not mention the fact that the officer is 100% shareholder of the corporation. It is a corporation, is that correct? As stated above a 100% shareholder is a "related party" as described by section 167. An accrued bonus deducted in year 1 and paid in year 2 is an attempt to reduce the corporate tax and defer the shareholders tax on the bonus until the next year. This manipulation of the taxation, that is the deferral for a year, is would not be available to someone who is not in control of the corporation, that is the relationship based upon the 100% ownership of the stock.
The loan reduction would be a taxable event in the year paid, or accrued, by the corporation and would be includable in the officers compensation. Reducing the officers loan is not different than paying his home mortgage, or any other debt. It is taxable for income taxes and payroll taxes to the extent of the limit.
And yes, when compensation is recognized the payroll taxes are due and owing and can be accrued by an accrual basis taxpayer.
As a rule of thumb salaries credited on corporate books are taxable to an officer in the year when the officer may withdraw the compensation at will if the corporation has the funds available to pay the salaries without causing financial difficulties. Bonuses that are based on yearly sales and that are otherwise not available to an officer are taxable in the year of receipt. Given the material amounts involved the matter should be discussed with a tax professional such as a CPA or Enrolled Agent with corporate tax experience.
thanks for the information; I'll look this over..
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