ACCT 421A: CORPORATE TAX : Chapter Sixteen
5. How are farmers treated differently from other producers in regard to tax accounting? Since farmers are usually allowed to use the cash method of accounting, the UNICAP rules do not apply to farmers, except in the case of plants with a reproduction period of more than two years. The farmer can elect to use the farm price method of the unit-livestock-price-method. A farmer may also elect to average the income from farming as if it was earned over the three preceding years. Farmers are also granted special treatment in regard to the year income must be reported following a natural disaster or drought.
6. In December 2011, Nell, a cash basis taxpayer, paid…show more content…
This result occurs because the tax law considers this to be deferred compensation that is ineligible for recurring item exception, unless it is paid by March 15 of the year following the accrual (see Section 404 (a)(5) and (6).
Your client has asked whether the related accrued Social Security taxes on the vacation pay can be accrued under the general recurring item exception because the taxes will be paid by the fifteenth day of the ninth month after the close of the tax year.
The client would like to know if the related accrued Social Security taxes for accrued vacation pay earned but not paid can be deducted as a year-end accrual.
The client is not per mitted to deduct a year-end accrual for vacation pay earned but not paid. The tax law considers this to be deferred compensation that is ineligible for the recurring item exception, unless it is paid by March 15 of the year following the accrual.
Under §404(a)(5) vacation pay is treated as deferred compensation and is only deductible in the year it is paid to the employee. In Eastman Kodak Company, The United States [76-1 USTC 9363], (Apr. 14, 1976) it was found that Kodak was not entitled to deduct employment taxes pertaining to vacation pay and bonuses accrued but not yet paid since liability for such taxes does not attach until such forms of compensation are actually paid.
The client is not