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IRS finally admits losing! Deduct accrued payroll taxes on year-end accrued wages, bonuses, and vacation

In the past, the IRS would not allow accrual-method taxpayers to accrue and deduct FICA and FUTA taxes until the year that compensation related to the payroll tax was actually paid. Effective for years ending on or after December 31, 2007, Revenue Procedure 2008-25 allows certain taxpayers the ability to adopt a safe-harbor method to deduct payroll taxes related to payroll accrued as of the end of the year and paid prior to the filing of the tax return.

Note that IRS rules require taxpayers to prepare their tax returns using a consistent method, even if the current method is incorrect. Certain safe-harbor changes are automatically allowed (the IRS has specified many such changes in prior rulings). In order to satisfy the safe-harbor method and deduct the payroll-tax liability, a taxpayer must file Form 3115, “Application for Change in Accounting Method.” The form is filed with the tax return for the year in which a taxpayer changes its method.

The accounting method change, along with the recurring-item exception, allows taxpayers to accrue payroll taxes that will be paid by the earlier of the filing of the tax return, or within eight and a half months after the end of the taxable year. Taxpayers are also allowed to accrue payroll taxes related to deferred compensation paid more than two and a half months after the close of the taxable year even though the accrual taxpayer cannot deduct the deferred compensation itself until the year paid.

Many taxpayers may not elect to accrue payroll taxes for financial statement purposes since it is not a requirement under GAAP. Speak with your tax representative to see if you can take advantage of deducting payroll tax earlier.

For more information, contact Kira Wheat at 312-980-3331, Mike Calahan at 312-980-2996, or your Blackman Kallick representative.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.