Help me settle this argument - Should Cash Basis s corp list 401k payable on Schedule L

[TaxS]

Help me settle this argument.

I am S Corp.  I run payroll in December - say $100k.

I have a 25% profit sharing 401k plan.  

My P&L statement shows the $25k expense on Line 17 Pension, profit-sharing, plans

I will transfer that $25k to the brokerage account sometime in Jan/Feb.

Should my Schedule L show the $25k liability?

I do; my friend does not.

Who is right?

[Anonymous_]

I'm going to page @Rick19744 and @Mike9241 to have a look at your fact pattern.

[Rick19744]

In general, under the cash basis of accounting, transactions are only recorded when there is a related change in cash.  This means there are no accounts receivable or payable reflected on the balance sheet.

Based on your facts, you have not had that change in cash.

However, if this 401k is an allowable expense for the applicable 12/31 year, then I would reflect it on the balance sheet to minimize any confusion.

Reflecting this on the balance would minimize the complexity of having to record a book to tax adjustment for this two years back to back.

Not a big deal.

[Mike9241]

from a pure technical standpoint, the liability should not be reflected. from a practical standpoint the liability can be reflected since the deduction is allowed for the year of the return rather than in the year actually paid.   this is similar to credit card debt for which the tax laws allow a deduction in the year the debt was incurred even though the debt is not paid until future years.  when i was working for CPA firms we always reflected the 401k, pension and other liabilities if the deduction was allowed for the year of the return.  this was to avoid M-1 adjustments. other firms might have done it differently.     we never had an issue even when the iRS audited returns because the taxable income was correct even though cash method was specified.  some might argue that on the return you should check other for the accounting method and list "hybrid" but if you change it you may get an inquiry from the IRS about changing accounting methods without filing form 3115.

i would say continue as you have done in the past and your friends can handle it their way. so ny position is that there is no right or wrong method so this battle ends in a draw. 

this is from the iRS pub on accounting methods

"Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them." if this was an absolute you could not deduct the 401K contribution for 2022 until 2023 when you paid it. but the tax law does allow the deduction in 2022. 

[TaxS]

Thank you Tagteam for paging level15 users who prompty answered my question.

 @Rick19744 and @Mike9241 two follow up questions.

1) We both deducted the following expenses on our 1120S for 2022.

a. Employer payroll taxes on 2022Q4 salaries that were sent to IRS in 2023Q1

b. Exepnses paid by credit card in 2022 Dec.  But the credit card was paid in 2023 Jan

I showed the above as liabilities on Schedule L for 2022. My friend did not. 

Based on your comment above, I assume both of us are right.  Can you confirm?

2) How should withheld amounts be treated?

a. Employee 401k deferrals

b. Withheld Income tax and withheld FICA

Obviously, neither of us claim these as epenses but I show them as liabilities on my Schedule L. My friend does not.

Again, who is right?

[Rick19744]

Response to your follow-up questions:

• Reread my original reply.  It stated that transactions are only recorded when there is an actual change in cash and you do not record any accounts receivable or payables (not reflected on the balance sheet).
• In the original question, there is an exception to the general rule for the year in which you are able to deduct your 401k.  That is why I indicated to put that on the balance sheet to simplify the accounting.
• Your other questions (follow-up post) related to payroll taxes and credit card expenses:
  • Employer payroll taxes that have accrued but not paid until 2023 are not deductible and should not be on the balance sheet.
  • Credit card expenses are not deductible until paid.
• Employee withholdings are technically wages.  If the wages have been paid, but you have not remitted the withholdings, you could reflect these on the balance sheet.
• What you are able to do is maintain your books and records on the accrual basis and your tax return on the cash basis; assumption is that you are eligible.  This would require book to tax adjustments on Schedule M-1, but provide a better understanding of the business on the balance sheet.
• You may want to visit with a tax professional to get some guidance to help you understand the best bookkeeping method for you and how to account for it.
• At the end of the day, don't get too hung up on the balance sheet presentation as long as the tax return bottom line is correct; meaning page 1, Sch K and K-1.

[Mike9241]

see this thread about credit card expenses which when I was working for various firms we deducted in the year incurred following the medical expense ruling.

https://www.dinesentax.com/when-are-purchases-made-with-a-credit-card-deductible/ 

2) How should withheld amounts be treated?

a. Employee 401k deferrals

b. Withheld Income tax and withheld FICA

these are not expenses. they have been deducted from the employees payroll checks and are properly reflected as a liability.

your friends must have fun reconciling the payroll tax forms and income tax returns.  

[Rick19744]

I am aware of Revenue Ruling 78-38 (mentioned in the referenced link) and have used that for charitable contributions.

Keep in mind that revenue rulings are based on a specific set of facts, and the revenue ruling mentioned in the article was specific to charitable contributions.  This was also the result of uproar over a prior revenue ruling.

Also keep in mind, that while some may use that ruling broadly, it does not guarantee that you will prevail if audited.  It does however, give you a decent position if audited.

Your choice.

[mirthaguer]

The amounts paid by credit card are deductible when charged to the credit card.