March 2010

The Proper Timing of Workers' Compensation Deductions

From Journal of Accountancy

For companies with more than a de minimis amount in their workers’ compensation reserve, it may be worthwhile to review the details underlying the reserve amount. The reason? These days a significant portion of a workers’ compensation reserve likely results from amounts due to medical service providers for treatment already provided to injured employees. And while a payment or series of payments required under a workers’ compensation act is treated as a payment liability under the IRC § 461(h) economic performance rules, the liability for medical services provided to an injured employee is treated as a service liability.

This difference is significant for income tax purposes, since economic performance occurs with respect to liabilities arising out of the performance of services as those services are provided. Thus, a portion of a taxpayer’s workers’ compensation reserve may represent a liability that is properly deductible for tax purposes in the year the medical services are provided to the injured employee (instead of the year payment is made).

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