Free Trial: TheSiteFactory.com

accrued payroll tax treatment

Technical topics regarding tax preparation.
#1
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
Please advise if the following practice is legitimate. taxpayer has a S corporation which pays salary to him. s corp. uses cash basis accounting and posts accrued salary on balance sheet, i.e., s corp recorded salary on income statement and the salary is not paid out but accrued to be paid in the future. The s corp.files payroll taxes as if the salary had been paid out.
Thank you so much!
 

#2
Posts:
648
Joined:
28-Jul-2017 12:08pm
Location:
North Country, USA
did the shareholder/employee pick up the wages in his W-2? sounds like it's not an accrual, sounds like either a loan from the shareholder/employee, or a capital contribution... in which case taxable income sounds okay?
 

#3
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
HenryDavid wrote:did the shareholder/employee pick up the wages in his W-2? sounds like it's not an accrual, sounds like either a loan from the shareholder/employee, or a capital contribution... in which case taxable income sounds okay?


Yes the accrued wage is shown in w2.
 

#4
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Then there is no problem. See reg. 1.451-2 and see RR 72-317.

To avoid questions, consider HenryDavid's point. Move accrued expense to loan from shareholder.
 

#5
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
Nilodop wrote:Then there is no problem. See reg. 1.451-2 and see RR 72-317.

To avoid questions, consider HenryDavid's point. Move accrued expense to loan from shareholder.


Thank you! Can you provide a link for RR 72-317? I have not found it online. Thank you!
 

#6
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
You can find it easily in Legalbitstream.com.

Also see this article. https://www.thetaxadviser.com/issues/20 ... nuses.html

Also see this TPT thread viewtopic.php?f=8&t=515
Note post #9, in which a former TPT member, greatly respected too, said
I myself wouldn't want to rely on the constructive receipt doctrine to take an unpaid deduction for a related party.
. I apparently agreed with him. I don't remember why.
 

#7
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
Nilodop wrote:You can find it easily in Legalbitstream.com.

Also see this article. https://www.thetaxadviser.com/issues/20 ... nuses.html

Also see this TPT thread viewtopic.php?f=8&t=515
Note post #9, in which a former TPT member, greatly respected too, said
I myself wouldn't want to rely on the constructive receipt doctrine to take an unpaid deduction for a related party.
. I apparently agreed with him. I don't remember why.


Thank you again for sharing all these!
 

#8
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
If the unpaid salary has sit on balance sheet for a while, say 2 years. does that sound reasonable? esp. if the s corp does not generate enough income to cover salary.
Last edited by cl2018 on 16-Oct-2020 10:37am, edited 1 time in total.
 

#9
Posts:
1451
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
No, that does not sound reasonable to me. If the company is not profitable enough to pay him a salary, don't accrue it. Why would the individual want to do this accrual and pay tax on income they are not receiving?
 

#10
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
Seaside CPA wrote:No, that does not sound reasonable to me. If the company is not profitable enough to pay him a salary, don't accrue it. Why would the individual want to do this accrual and pay tax on income they are not receiving?


Thanks for the response!
Is there IRS regulations that disallow such practice? I guess I will need that to convince the company to quit such practice.
 

#11
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
This is sounding other-worldly. Why does he want that result and why does he need persuading? Building up Soc Sec benefits or what?
 

#12
cl2018  
Posts:
295
Joined:
14-Dec-2018 10:38am
Location:
NJ
Nilodop wrote:This is sounding other-worldly. Why does he want that result and why does he need persuading? Building up Soc Sec benefits or what?


I think it's for social security credits. The practice sounds not so legitimate to me that's why I am thinking of asking them to stop it. But I can't find relevant regulations to support my position, either.
 

#13
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Looks totally legit to me.
 

#14
Posts:
1451
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
The only way I would ever consider going along with it would be if he actually cuts himself a paycheck for the payroll; then he turns around and writes the company a personal check to be deposited back into the corporation. That would then be booked as a loan, or additional paid in capital - not accrued payroll.

The way it is being done, is the net amount giving him basis in the S-corp? I would think the IRS would frown on that if no money were changing hands.

This is just my opinion - nothing to back it up!
 

#15
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
The only way I would ever consider going along with it would be if he actually cuts himself a paycheck for the payroll; then he turns around and writes the company a personal check to be deposited back into the corporation. That would then be booked as a loan, or additional paid in capital - not accrued payroll.. That would certainly be an improvement over the informal way it was done.

But think about it. What would IRS do? Say you did not receive the salary so you over paid FICA/Medicare taxes and we will refund them to you to the exrent they are within the statute of limitations, but we'll keep the rest but noy give you credit towards retirement benefits? I guess that's all possible, but seems really unlikely to me.
 

#16
Posts:
175
Joined:
22-Sep-2014 9:25am
Location:
Farmington, Michigan
How is it legit to deduct unpaid accrued expenses on the cash basis?
 

#17
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
This thread is linked in #6 above. Here it is again. viewtopic.php?f=8&t=515. The thread discusses constructive receipt. It's better to write a check* and then another one back. But if it's not done, I'd personally still claim it. It's not a shoo-in, but I'd argue IRS would be inconsistent to treat it as wages subject to withholding and payroll taxes but not for income tax deductin purposes. One of the posts in the linked thread says the poster would not rely on it. I agree documentation and checks would be ideal, but it's not always an ideal world.

*Although the Supreme Court points out that
a transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred.
https://caselaw.findlaw.com/us-supreme- ... 9/569.html


How is it legit to deduct unpaid accrued expenses on the cash basis?
. By arguing constructive receipt.
 

#18
JR1  
Posts:
3339
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Wow. While Seaside's approach is the technically correct one, I think I'd just journal entry this via shareholder note and call it a day.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#19
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Posted in wrong thread. Don't know how to delete.

From article in context of family loans:
15 See Blattmachr and Madden, ‘‘How Low Can You Go?’’ 109 J. of Tax’n 22 (2008), discussing the tax treatment when this oc- curs. For a contrary view see Hayes, ‘‘Adventures in Forgiveness and Forgetfulness: Intra-Family Loans for Beginners,’’ 13 Califor- nia Trusts and Estates Quarterly No. 2, 5 (2007). The complete analysis provided under the article by Philip J. Hayes is as fol- lows:
One factor indicating that a loan lacks bona fides is the exchange, during periods of falling interest rates, of a note for a new note with the same principal amount but bearing a lower interest rate. Some practitioners are un- concerned with refinancing an intra-family loan to a lower rate if the loan allows prepayment (almost all do, or, if silent, state law permits). More cautious advisors recommend avoiding this practice (see, e.g., Benjamin Feder, The Promissory Note Problem, 142 Trusts and Estates 10 (January 2003)), however, based on the plain economic reality that a true lender would not trade one asset for another less valuable. To avoid the IRS argu- ment that the loan is actually a gift, these advisors rec- ommend renegotiating the terms of the note to compen- sate the lender for the lower interest rate; perhaps by paying down the principal amount, shortening the matu- rity date, or adding more attractive collateral. The IRS has provided no direct authority on this issue. The Pro- posed Regulations include a section entitled ‘‘Treatment of Renegotiations,’’ (Prop. Treas. Regs. §1.7872-11(e)) but merely reserves the subject for later guidance, which has not been forthcoming.
https://gassmanlaw.com/wp-content/uploa ... rticle.pdf
Last edited by Nilodop on 21-Oct-2020 6:28pm, edited 2 times in total.
 

#20
Nilodop  
Posts:
13805
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Posted in wrong thread. Don't know how to delete.

I thought I saw something posted about a renewable 1-year note. But it's gone now. Anyhow, for determining AFR:

Sec 1274(d)
(3) Term of debt instrument
In determining the term of a debt instrument for purposes of this subsection, under regulations prescribed by the Secretary, there shall be taken into account options to renew or extend.
 


Return to Taxation



Who is online

Users browsing this forum: No registered users and 73 guests