Question

Identify which of the following statements is true. A. A corporation that accrues compensation payable to an employee must pay the amount within two and onehalf months after the close of the taxable year to deduct the amount in the year of the accrual. B. Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan. C. Accrued compensation not paid within three and onehalf months after the close of the corporation tax year is deducted in the year following the accrual. D. All of the above are false.

Answer 1

Answer:

A. A corporation that accrues compensation payable to an employee must pay the amount within two and one half months after the close of the taxable year to deduct the amount in the year of the accrual.

Explanation:

This is called the 2.5 months rule. Sections 404 and 451 state that accrual taxpayers are allowed to claim deductions for accrued compensation even if it actually paid them after the business's tax year is over. In order for this rule to apply, the accrued compensation must:

• satisfy the all events test: the events that result in the accrued compensation must occur before the compensation is made, e.g. you must work for a company during year X before the company hands out a bonus for year X.
• the compensation must be paid within 2.5 months after the business's tax year is over. E.g. if a company's tax year ends on December 31, all accrued compensations like paid vacations or bonuses must be paid before March 15.