Tax Experts- NATP Question

[peanut]

In Oct NATP posed a question in their weekly TaxPro. An accrual corp ( calendar year) is planning to pay a bonus for 2008 to all employees who are not related ( shareholders). The corporation will not pay the bonuses until 2009. How long does the corp have to pay the bonuses in 2009? The answer was that they have to be paid within 2 1/2 months or March 15th Citing Reg 1.461-1(a)(2)(i)---the all events test. Now I am aware of IRC 267 of accruals to related parties. My reading of the Reg---I could not find the 2 1/2 months rule. What am I missing?
Thanks

[Nashville]

Two separate issues

The limits on deductibility for related taxpayers and for other liabilities are two separate issues. I can't give you a cite.

I will admit to being old enough to remember when companies could create expenses by establishing reserves, fictitious or not, to lessen their tax liability. A reasonable reserve for bad debts is still allowed as a tax deduction, but in general such things as accrued warranties or product liability, contingent liabilities, etc. were being created and they gave rise to expenses which were deducted.

I believe it was the 1986 Tax Code which stopped this practice. Recognition of accrued expenses for such things as warranties, retiree costs and related medical expense, etc. are still being done for GAAP, but the inability to deduct these things creates a book-to-tax difference.

[Bees Knees]

I also do not see any reference to 2 1/2 months in the cited reg. Write to NATP and ask them to explain.

[Roland Slugg]

This is an exception to the deferred compensation rules. If an accrual-basis employer pays the bonus within 2½ months after the close of the tax year, then a deduction for the bonus won't be subject to the deferred compensation rules, which would otherwise bar the deduction until the bonus is included in the employee's income. (Regs. §1.404(b)-1T)

Payment after 2½ months is presumed to be deferred compensation, and although that presumption can be rebutted (also Regs. §1.404(b)-1T), it would be better to avoid it.

[peanut]

Roland

Thanks so much for clarifying the deferred compensation for unrelated employees as to the 2 1/2 mo rule under Reg 1.404(b)t. I guess I wasn't aware of it.