CASH BASIS TAXPAYERS
If you file your business returns on a “cash basis,” you generally can get your deduction if the check for a deductible expense is postmarked by December 31. If you are talking big numbers, you should consider a wire transfer, or at least a certified mail receipt to prove you sent the check on time. Postage meter postmarks are almost worthless in trying to prove a timely payment.
There is one common expense that can be paid after year-end by a cash-basis taxpayer without losing the deduction: pension and profit-sharing contributions. If your plan is in place by year-end, you have until the due date of the 2013 return to fund the 2013 contributions; if you extend the return, you also extend the funding deadline.
If you are looking to reduce expenses by buying a depreciable asset and using the Section 179 or bonus depreciation rules, the asset has to be “placed in service” by December 31 to get a 2013 deduction. It’s not enough to pay for it by year-end if it’s not placed in service.
ACCRUAL BASIS TAXPAYERS: EXPENSES TO NON-RELATED PARTIES
Accrual-method taxpayers have less flexibility in controlling their income and deductions, but they usually have more ability to deduct unpaid income.
If an expense is accrued to a non-related party, the deduction timing depends on what the expense is for. Accrued compensation must be paid within 2 1/2 months after year-end to be deductible in the year it was accrued. Most other accrued expenses must be paid within 8 1/2 months of year-end under the “recurring item” rules, if the taxpayer has made the proper accounting method election. Accrual taxpayers have the same deadline for funding pension and profit-sharing plan contributions as cash-basis taxpayers.
Remember that if you are required to maintain inventories, merely filling your storeroom with inventory isn’t going to help reduce your taxes.
ACCRUAL BASIS TAXPAYERS: RELATED PARTIES
There are some expenses that accrual-basis taxpayers can only deduct on a cash basis. If you owe money to a “related party,” there is no deduction until the related party has to take the payment into income. For example, a calendar-year corporation cannot deduct a bonus to its sole shareholder for 2013 unless the bonus is paid by year-end and included on the shareholder’s 2013 W-2. The same goes for interest, rent, or any other accrued expense.
The related party rules are complicated. For purposes of deducting accrued expenses of C corporations, related parties include 50% owners and other corporations with 50% or more common control. “Family members” of 50% owners also are related parties; for this purpose, “family” is: “…brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”
This does cut off, though. You are considered to own what your husband owns directly, but you aren’t considered to own what your husband’s brother owns, even though your husband is considered to own it. A famous tax commentary explains this elegantly:
A fortiori, this limitation ensures that stock owned by Bittker will not be attributed to his parents and then from them to their parents, and so on back to Adam and Eve, and then down through the family of man to Eustice.
For S corporations and partnerships, the related party net is wider. You are considered a “related party” if you own any stock in the S corporation or any capital interest in the partnership. The constructive ownership rules also extend out one level further. So while your husband’s brother’s C corporation may deduct an expense accrued to you at December 31, 2013 that isn’t paid until January 2014, his S corporation may not.
If you are accruing an expense to somebody who might be related, ask your tax advisor to help sort out whether it needs to be paid by December 31 to get a 2013 deduction.
Two more 2013 year-end tax tips to go!
Tags: 2013 year-end tax tips