Unpaid payroll taxes - deductible?

[duanecpa]

For an employer who did not pay the payroll taxes (employer and employee portion of fica and medicare) by 1/15/2011, is the employer portion of such taxes deductible on the 2010 tax return or only when paid?

Thank you.

[jaybird]

If cash basis - Employer portions (FICA, FUTA and SUTA) get reversed for tax.

[Golden Rocket]

Accrual Basis

My opinion is that any expense is deductible on an accrual basis, so long as it is paid by the due date of the tax return. So if these taxes were not paid by 01/15 but they WERE paid by 3/15, they would still be deductible. (This reasoning assumes a calendar year fiscal).

There are more problems likely to surface if the payroll taxes were not deposited on time, but these are in the payroll arena and should not affect the deductibility of expenses that were paid by the due date of the tax return.

By the way, filing an extension does not extend the due date for purposes of accruing expenses.

[duanecpa]

Cash Basis Taxpayer

I take from the answer 'reversed for tax' means that it is not deductible until paid for a cash basis taxpayer.

Is there a specific citation for this particular situation?

Thanks again.

[jaybird]

Golden Rocket - that's interesting reasoning. Do you have any citation for that? On an accrual basis? If this was an accrual basis, it would not matter when it was paid. Cash - paid within the calendar year... What do you do for AR then? any AR received by 3/15 gets put on the tax return?


DuaneCPA - tax journal entries. "reversed for tax" - on the balance sheet, there are several accounts on the accrual basis (AR, AP, payroll, etc.) that need to be reversed for tax - meaning, adjust the liability and expense (take off the expense from the P&L). Shows up on your M-1. each year you will have the prior years adjustments added back, then current years reduced. Theory - you should be pay taxes on income not received, or expenses not paid.

[Golden Rocket]

Jaybird

I will supply citations when I can get back to my library and will post them using a different user name. The reasoning does not "mirror-image" into Accounts Receivable, as I don't believe they would write a regulation to stop a taxpayer from claiming revenue. Although our reasoning may equate the same mechanics to accruing revenue and expense, I don't think that line of reasoning is adopted by IRS.

I believe when I find the citation it will say "by the due date of the tax return or in the ordinary course of business." That's why you can't deduct things like accrued warranty, or accrued vacation (except to the extent it is paid by the due date), accrued pension reserves, etc.

And needless to say, any expenses accrued but not deducted by reason of the above become M-1 reconciliation items.

[New York Enrolled Agent]

Perhaps Revenue Ruling 96-51 is helpful. I'll paste the headnote. Note the caution

Rev. Rul. 96-51, 1996-2 CB 36, 10/21/1996, IRC Sec(s). 461

Time for claiming deductions—accrual basis taxpayer—all events test.
Headnote:
[Caution: This rev rul has been amplified by Rev Rul 2007-12, 2007-11 IRB.]

Under the all events test of Code Sec. 461; , an accrual method employer may deduct in Year 1 its otherwise deductible FICA and FUTA taxes imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met.

[jaybird]

We're talking about a cash basis tax payer right?

[Corduroy Frog]

Cash Basis

If we are talking about a cash basis taxpayer, none of the prior posts by Golden Rocket or NYEA are relevant. Unpaid is equivalent to undeductible.

[jaybird]

Unless its a credit card...or some funny rule with deferred comp, or the EE's portion of payroll tax. But, for mostly everything else, that's my understanding - not paid - not deductible.

[JG EA]

Cash Basis

We've had posts on this before. I tried hard to do this by the book and it was impossible for me! I would get unreasonably confused. So, I determined to just count payroll taxes for the paydate in December even though not paid by the employer until next year. This seems the only consistant way to do it in my case.

It sounds simple to write it down and deduct it next year. But try correcting payroll, checking all the percentages to FUTA, FICA, SUTA, taxes and then comparing it with the books, accounting for last year's payments and this year's non payments. It is possible, but I guarantee that if someone else did the taxes the next year they wouldn't be able to follow what you did.

Also, notice many payroll reports - they are on the actual payroll costs even if you check "cash basis". They go by payroll date.

[Gretel]

It probably depends on the scope of it. Not to say that is an excuse for not following the rules but it needs to be reasonable. A small company with, let's say 3 employees, will have about the same payroll taxes every year. If there is not much fluctuation it won't even change the tax return much. Only first and last year being different.

[ttbtaxes]

We've had posts on this before. I tried hard to do this by the book and it was impossible for me! I would get unreasonably confused. So, I determined to just count payroll taxes for the paydate in December even though not paid by the employer until next year. This seems the only consistant way to do it in my case.

It sounds simple to write it down and deduct it next year. But try correcting payroll, checking all the percentages to FUTA, FICA, SUTA, taxes and then comparing it with the books, accounting for last year's payments and this year's non payments. It is possible, but I guarantee that if someone else did the taxes the next year they wouldn't be able to follow what you did.

Also, notice many payroll reports - they are on the actual payroll costs even if you check "cash basis". They go by payroll date.

My concern would be how I'd defend a $1,000/$5,000 proposed preparer penalty by the IRS for taking a position on a return that has no supportable basis for deduction.

[geekgirldany]

We've had posts on this before. I tried hard to do this by the book and it was impossible for me! I would get unreasonably confused. So, I determined to just count payroll taxes for the paydate in December even though not paid by the employer until next year. This seems the only consistant way to do it in my case.

I've always done this also. There is a long discussion on Tax Almanac about this:

http://www.taxalmanac.org/index.php/Discussion:Cash_basis_adjustments

Bascos Case, TC Memo 2008-294 was brought up by one poster.

I believe that if you get into extremely large businesses is where this would become a problem. I deal with small businesses that have from one to ten employees.

[taxxcpa]

Cash basis

I've always charged the employer share of FICA as if it were paid in the same quarter or year in which it accrued. Technically this is incorrect. I deduct the tax paid in January of 2010 as
if it had been paid in December 2009 (assume $ 1000). Then I deduct the Jan 2011 payment as if paid in December 2010 (assume $ 1100).
The net effect of the above example would be a $ 100 over-deduction in 2010. Would the IRS actually be concerned about this minor error?

I consider small, insignificant items such as this not worth worrying about, especially since, in the long run, all such taxes are deductible even if there is a slight timing difference.

If I were handling Exxon's books, I might do it differently since the amounts could be significant.