Accounting Method-Sub S Corp

[djack1040]

New Sub S Corp for 2005 will file as "Cash Method".

With respect to employer's payroll tax expense for the 4th Qtr 2005, (to be deposited Jan 15, 2006)can these be deducted (ie, 'accrued') on the 2005 income tax return?

I seem to recall that payroll tax expense was a specific exception to still being able to deduct and remain a cash method taxpayer even though the expense was not paid until the following year. However, I have not found any written discussion in my research.

Maybe my mind is playing tricks on me.

[Safire]

I think you are correct.

I have always done that and never had a problem.

[taxlady]

Payroll taxes are always deducted in the year accrued regardless of whether the return is filed as cash or accrual basis.

[Gretel]

Easier

Yes, it's easier to take as expense in year accrued but not correct. Only payroll expenses actually paid are deductible. If every year is about the same it doesn't make much difference.

But what about a company, which pays payroll taxes much later because of cash flow problems?

[oceanlovin'ea]

Payroll taxes

If you use Quickbooks, the program automatically debits the expense and credits payroll liabilities when you are doing the payroll. So then it is in your expenses as of the end of the month.
The other bookkeeping program I was using didn't do this automatically and I was posting the expense when I paid it.

Linda F

[rosieea]

I've always deducted the accrued payroll tax expense for a cash basis taxpayer, but I have no cite and suspect that it is technically incorrect. That said, I've never had it questioned, and a few colleagues say that in audit the examiner has not had a problem with it. I see no reason not to take it, and I don't think it's particularly aggressive.

[Armando Beaujolais]

Tax Court, Tippin, 104T.C. 518:

"...On Schedule C of their tax returns, petitioners deducted these [FUTA and FICA] taxes for the year in which the liability accrued (i.e., the year in which the wages were paid), even though petitioner did not pay the tax until a later year…Nothing in section 1.461-1(a)(3), Income Tax Regs., allows a cash basis taxpayer to deduct a tax before the year of payment. See also Rev. Rul. 74-70, 1974-1 C.B. 116 (for cash basis taxpayers, FICA and FUTA taxes are deductible for the tax year in which they are paid). Accordingly, petitioners may not deduct either the FUTA taxes or petitioner's share of FICA taxes until the year in which he paid such taxes..."

[oceanlovin'ea]

Armando

So do you have to back that amount out of the expenses if you are using a program like Quickbooks that expenses it at the time of posting payroll?
Would you actually make a journal entry to do that? Otherwise, it would not be added to next years expenses unless you remembered to do it.

Linda F

[Gretel]

Not Armando

Yes, I would make a journal entry and reverse it in the beginning of January. QB premier has a feature were you just hit a button to do the reversal.

But I wouldn't bother for minimal amounts.

[djack1040]

Quickbooks Liabilities

Armando-Thank you for the answer. You are always very professional in your posts and I appreciate your effort to get a cite.

Linda F-You want to be sure your report basis is "Cash" vs "Accrual".
In the Quickbooks Reports section, run a Balance Sheet dated 12/31 and note the amount for payroll liabilities. Then go to "Modify Report" and make sure it is checked "Cash". It may be defaulting to "Accrual".
If that is not the problem, I would hassle Intuit for an answer (good luck).

Thanks again Armando!

[JG EA]

Cash Basis

I tried for years to post everything in its correct year. But, I found that it got so muddled, so hard to record, and so confusing that I gave it up. I now count all payroll taxes with its own payroll period. It is consistant year to year. So, if you in audit had to take it off the end of the year expenses, you could put it on the beginning of the year also.

This is a hard concept for someone who just had a Monk crisis today because all our W-2's didn't seat correctly into their envelopes. But, sometimes you just got to do what you got to do.

[OldJack]

I tried for years to post everything in its correct year. But, I found that it got so muddled, so hard to record, and so confusing that I gave it up.

I agree with payroll expense as a liability account with unpaid as an expense on a cash basis. Cash basis has always been a muddle and the IRS creates part of the muddle. As an example Rev Proc 92-71 allows the deduction of expenses from credit card charges (other than store cards where purchase). The result is a credit card liability on the balance sheet with the expensing of the item. I have never had cash basis entries as a issue on an IRS audit.

[jmc]

Accrue only employee's portion of FICA

"... Accordingly, petitioners may not deduct either the FUTA taxes or petitioner's share of FICA taxes until the year in which he paid such taxes..."

Then, it means that only employee's portion of FICA taxes is to be deducted and accrued, but FIT withholdings and other paycheck deductions are Not to be deducted and accrued. Am I clear on this?

[BOB W]

Clear?????

Then, it means that only employee's portion of FICA taxes is to be deducted and accrued, but FIT withholdings and other paycheck deductions are Not to be deducted and accrued. Am I clear on this?

Not really. Anything to do with employee's portion of anything is covered in the employees gross pay, which is deductible on the income statement. The unpaid employee's withholding is shown as a liability on the balance sheet.

The only issue here is the employer's portion of Fica & Futa.