Case

WHEN ARE ACCRUALS TAX DEDUCTIBLE?

ACCRUED TAXES

Is the accrual for real estate taxes?

ACCRUED REBATE, INSURANCE, PRIZES, AWARDS, WARRANTY

Was the recurring item exception elected with regards to these types of accrued items?

ACCRUED PROFESSIONAL FEES

Have the services already been performed by the service provider?

No

Is the accrual for payroll, state income or state franchise taxes?

Yes

Was an election made under §461(c) to ratably deduct real estate taxes as they are incurred?

No No Yes

X Co can deduct a ratable amount of real estate taxes that were incurred during the year.

Ex: On 12/31/2009, X Co accrues $2,400 in real estate taxes due in July 2010. X Co’s real estate taxes are owed to the county on a 7/1/2009 – 6/30/2010 basis. With a §461(c) election in place, X Co may deduct $1,200 (1/2 of the $2,400), in 2009 for the real estate taxes deemed incurred from 7/1/2009 - 12/31/2009. The remainder will be deducted in 2010. (§461(c))

Yes

X Co may deduct in 2009 all accrued rebates, insurance, prizes & awards, or warranty costs paid within the earlier of 8 1/2 months of year end or the filing of the tax return.

Ex: X Co accrues $20,000 of rebate costs incurred but not yet paid on 12/31/2009. X Co will pay the $20,000 of rebate costs on April 12, 2010, and file its 2009 tax return on July 25, 2010. If X Co has elected the recurring item exception for rebate costs, X Co may deduct the full $20,000 in 2009, as the rebates will be paid within the earlier of 8 1/2 months of year end or the filing of X Co’s 2009 tax return. (Treas. Reg. §1.461-5)

No

Was the recurring item exception elected with regards to accrued professional fees?

Yes

X Co may deduct accruals for services performed by an outside service provider if the services have been provided by year end and the amount due can be determined with reasonable accuracy.

Ex: WS+B performs tax services for X Co in November 2009, and in December 2009 bills X Co $20,000 for such...