Accrued Vacation

[Snaggletooth]

Are there any special regs which address the deductibility of Accrued Vacation?

The "normal" axiom for accrued expenses are that they should be paid by the
(i) due date of the tax return, or
(ii) in the ordinary course of business.

One of my C corps has some $200,000 in accrued vacation, collectively for
its 125 employees. By the due date of the return, perhaps some $70,000 of this
will have been paid.

Amount not paid by due date of return: $130,000.
Amount not paid in the ordinary course of business: zero.

The previous preparer made no book-to-tax adjustment for Accrued Vacation.

Comments or suggestions??

[Roland Slugg]

2½ month rule

For an accrual basis employer, vacation pay earned during any tax year but not paid on or before 2½ months after the end of the tax year is deductible in the employer's tax year in which it's paid. (Code §404(a)(5))

[Snaggletooth]

Taking It on the Chin

Roland, thanks for your response and cite.

Having come to grips with the fact that this client's taxable income will be wratched up by $130,000, is there any way to take the hit over a four-year period. Like submitting a 3115?
I don't see any precedent for it, but I would rather him not have to cough up. It took years to develop this liability, and I would like for him to have "years" to pay for it, if possible.

Support for a 3115 might be due to the fact that the unpaid vacation liability has never been recognized for tax purposes. From all I can tell, it has always been recognized for book purposes - so the corporation is not really changing its "book" method. If a 3115 is proper, would there be a user fee even though the IRS is the beneficiary of the change?

His last-year tax man (friend of mine) told me he never felt a tax adjustment was necessary since the expense was "paid in due course of business." Your cite blows this argument out of the water.

[Roland Slugg]

Yes, your client may file F-3115 to change its method of accounting for vacation pay to the one proscribed by Code §404(a)(5). This is one of the numbered "pre-approved" accounting method changes. It's #28. See the Instructions for F-3115, page 11. No user fee is required for any of the pre-approved changes.