![]() ![]() The expense must be one that can generally be expected to be incurred year after year. Under this provision, taxpayers can deduct an accrued expense if the first two items above have been met and the economic performance (depending on the expense category, this is not necessarily the payment) occurs before the earlier of 8.5 months, or the filing of the return. ![]() In most cases, economic performance occurs when the party to be compensated has done what it needs to earn that compensation. Economic performance may vary between different types of liabilities and taxpayers can elect to treat some, but not all, liabilities under the recurring item exception. We’ll look at the nuances of several instances of accruals. While items one and two are more straight forward, item three can be more complicated. If the exact amount is determined to be different, the difference should be taken and accounted for in a later year in which the exact determination is made. The Amount of The Liability Calculation Is Reasonably AccurateĪn exact measure of the liability is not necessary, if a reasonably accurate amount can be determined. The ruling states that the mere execution of an agreement to provide service for a particular year is not enough to satisfy item one. The performance required by the agreement should be performed prior to any accrual being made. ![]() The IRS provides a bit of guidance on this matter through Ruling 2007-3. This means that there are no conditions or contingencies that exist that bring into question that a true liability exists. The amount of the liability calculation is reasonably accurate.Īll Events Have Occurred That Established the Fact of The LiabilityĪn accrued expense is deductible when it is fixed in place.All events have occurred that established the fact of the liability.Three qualifications need to be met before deductibility can be achieved: This is typically a concern for accrual basis taxpayers because cash basis taxpayers are, for the most part, only allowed to deduct an expense when it is paid. At first glance, they seem simple, but when you review the details, there are several considerations that need extra attention. Many accountants struggle with tax deductions related to accrued expenses. Don’t take the deductibility of accrued expense lightly. ![]()
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