As you peruse the file, you notice that in preparing the book-tax adjustments for the prior year’s return, the previous preparer analyzed a number of accounts found on the balance sheet. Included among them were:
Accrued bonuses
- Accrued vacation
- Accrued rent
- Accrued warranties
- Accrued accounting fees
- Accrued workers compensation
Digging deeper, it becomes apparent that for each of the year-end accrual balances, the previous preparer asked the client to provide the amount of each liability that was paid within 8 ½ months of year-end.
Combining these two pieces of information, the previous preparer permitted a tax deduction for the amounts paid within 8 ½ months of year-end, and disallowed any remaining balance of the accrual.
Now you’re faced with preparing the current yearbook-tax adjustments, and you’ll be damned if you’re going to crack open the Code and figure out exactly why the previous preparer did what he did. Rather, you’ll just apply the tried-and-true Same-As-Last-Year method, analyze the same accruals, and ask the client the same questions that were asked in the past.
Fast forward seven years, and now you’re a tax manager. And you’re stillasking the same “How much was paid within 8 ½ months of year-end?” question of all of your clients to determine the amount of their year-end accrued liabilities that may be deducted on their tax return.
And while I hate to be the bearer of bad news, I’ve gotta’ tell you – you’ve been going about it all wrong. To be fair, I can’t say I blame you; the rules for determining when a taxpayer may deduct an accrued liability are varied and confusing. But after this week’s Tax Geek Tuesday maybe, just maybe, we’ll get you on the right track. [snip] The article continues at Forbes, click here to continue reading.
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