Deduction day looms. March 15 is the deadline for calendar-year corporate return filings and payments. It’s also an important deadline for accrual-basis taxpayers for another reason: compensation accrued at year-end by a calendar-year accrual-basis taxpayer has to be paid by March 15 of the following year to be deductible in the year accrued.
As every first-year accounting student learns, accrual accounting tries to match expenses with the period in which the income is earned. If a bonus is based on calendar-year sales or profits, it normally can’t be paid until after year-end, when the numbers are sorted out; still, the bonus is related to those sales, so accrual accounting counts the expense against that year’s income.
The tax law has many limits on accrual accounting. For example, accrued expenses to “related parties,” typically owners and their families, can’t be deducted until the expenses are actually paid. The tax law gives accrual businesses 2 1/2 months after year-end to pay accrued compensation to non-related employees. Otherwise, the deduction is deferred until the year in which the employee is paid.
Does the compensation have to be paid by Saturday, or can I wait until Monday? The tax law provides that when tax returns are due on a weekend, the deadline is extended to the following monday. That’s why 2013 calendar-year corporation returns are due March 17, 2014 – March 15 is on Saturday this year.
But the IRS says that doesn’t work for compensation. Rev. Rul. 83-116 holds that it only applies to “acts required to be performed in connection with the determination, collection, or refund of taxes” – things like filing returns. So, according to IRS, the March 15 deadline still stands for payment 0f 2013 accrued compensation. It’s not clear that the IRS would win in court on this — they have lost on a similar issue — but you don’t want to be the test case. If you want to deduct 2013 accrued compensation on your 2013 return, pay it by Saturday.
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