Schmidt Baking Company, Inc. - Page 16

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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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