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as vacation pay earned in the current taxable year, but
paid in a subsequent year) for employees, an employer
generally is entitled to claim a deduction in the
taxable year of the employer in which ends the taxable
year of the employee in which the benefit is includible
in gross income (sec. 404(b)). This rule applies to
deferred benefits without regard to the economic
performance rules. Consequently, an employer is
entitled to a deduction for vacation pay in the taxable
year of the employer in which ends the earlier of the
taxable year of the employee for which the vacation pay
(1) vests (if the vacation pay plan is funded by the
employer), or (2) is paid.
An exception to this rule applies to amounts that
are paid within 2-1/2 months after the close of the
taxable year of the employer in which the vacation pay
is earned. Such amounts are not subject to the
deduction timing rules applicable to deferred benefits,
but are subject to the general rules under which an
employer is entitled to a deduction when performance
occurs (i.e., when the services of the employee for
which vacation pay is earned are performed). Because
amounts paid within 2-1/2 months after the close of the
employer's taxable year generally will qualify for the
exception to the economic performance requirements,
such amounts generally will be deductible for the
preceding taxable year (the year in which the vacation
pay is earned) even though the employee does not
include the benefit in income in the preceding taxable
year.
* * * * * * *
Reasons for Change
The special rules under present law relating to
the reserve for accrued vacation pay create a disparity
in tax treatment between accrued vacation pay and other
deferred benefits. The committee believes that the
timing of deductions for vacation pay should not be
more favorable than the timing of deductions for other
deferred benefits.
Explanation of Provision
The special rule that permits taxpayers a
deduction for additions to a reserve for vacation pay
would be repealed. Accordingly, under the bill,
deductions for vacation pay would be allowed in any
taxable year for amounts paid, or funded amounts that
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Last modified: May 25, 2011