Thanks for the feedback. That makes more sense. On a recent client, the IRS also questioned the deduction
after year end. Below is a summary of the anticipated adjustment as a result.
A 481(a) adjustment is intended to adjust historically for the proper deduction that would have been taken had the proper method been followed. With that said, in this context, in 2011, $15,000 was over-deducted. If the correct method was followed, no deduction would have been taken for the $15,000. This will be the 481(a) adjustment related to the 2011 year. Note the 481(a) adjustment is a cumulative adjustment which is meant to get the accounts to the correct starting point.
After taking that 481(a) adjustment, your accounts will be as follows:
12/31/11 Accrued Vacation - (20,000)
12/31/12 Accrued Vacation - (25,000)
This results in an unfavorable addback of $5,000, because the accrual increased. A favorable deduction will occur when the accrual decreases.
In future years, the net deduction/addback will equal the change in accounts. This is still considered following the accrual method, but the primary difference is payments made within 2.5 months after year-end will not be deductible in the respective year.
Please advise if you have any additional questions. I hope this clarifies the deduction a bit.