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RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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Will the IRS allow a cash basis taxpayer to take a deduction

Resolved Question:

Will the IRS allow a cash basis taxpayer to take a deduction in the current year for the employer’s share of FICA/Medicare taxes, the payroll tax expense, if the employer has not made ANY payroll tax deposits? I am preparing "S" corp income tax returns (covering several years) and would normally record the employer portion of FICA tax as an expense because most taxpayers make payroll tax deposits monthly. This taxpayer however, has withheld taxes from employees gross but has failed to remit the employee portion and the employer portion. Can he go ahead and deduct this expense when incurred even though it has not been paid. I believe there is a special rule that allows cash basis taxpayers to accrue FICA tax expense when incurred, unlike any other kind of business expense which can only be deducted when paid on the cash basis. Also, I have been told that he can only deduct the net paycheck amount since he has never remitted the employee withholding either.

Submitted: 8 years ago.
Category: Tax
Expert:  RD replied 8 years ago.

This is a very good question and an often debated one.

Practically most accountants accrue the payroll tax liability and take a deduction for it in the year the payroll checks are issued even if the taxpayer is a cash basis taxpayer but there are rulings/ out there that restrict the deduction to the year the payment is made. I am surprised why the IRS has not come out with a clear guidance on this issue.

The safest way to handle this is to deduct it as a expense in the year it is paid.

There is a very good discussion on this issue at a website at the link below-

Let me know if you have any other questions.

Customer: replied 8 years ago.

Thanks for your time. I do realize that it can be handled one way or the other, I do have a choice. Your answer says, "there are rulings out there that restrict the deduction to the year that the payment was made, I have been trying to find those rulings, ie, something in black and white, plain English, that will tell me that "a cash basis tax payer cannot deduct the employer tax portion of SS/Medicare taxes until actually paid." This deduction could equal $20,000 per year. I appreciate the advice to be "safe", but what I really want to do is be "right" and able to defend this position in an audit. I went to your discussion link and found the answer to be yes you can and No you can't. One guy says I agree with what is being said but I need a reference point. I am leaving for the day so I will continue my search next week.

Expert:  RD replied 8 years ago.

In order to be able to defend your position in an audit or any examination you should not take the deduction until the payment is made as that is the true cash basis accounting.

There are Revenue rulings cited on the link that I provided earlier which also provides for claiming deduction for expenses when paid.

Let me know if you have any other questions.

RD and other Tax Specialists are ready to help you
Customer: replied 8 years ago.

If I wait to take the deduction when paid then there would be no reason to defend my position as the tax has NOW BEEN PAID. I was trying to allow a taxpayer a deduction for payroll tax expense, for year 1 that would normally be paid in year 2. (FICA, Medicare) Just as I would for all of my other cash basis taxpayers for the month of December for example. , dr. FICA expense, credit PR liab. I have continued to read over the weekend and found that an accrual basis TP can use the "recurring item exception" to take a deduction for PR tax expense, and further read that if it the payment is never paid, such amount is not accruable. I will surmise from this wording that since my client has not paid the tax as of today, an accrual, cash basis, nor would modified cash basis taxpayer be allowed to record payroll tax expense. Thanks for your help.