Timing is everything A self-employed attorney, who is a cash-basis taxpayer, per

Question

Timing is everything

A self-employed attorney, who is a cash-basis taxpayer, performs work for a corporation which is an accrual-basis taxpayer and which is owned 100% by the attorney’s adult children.

Assuming they both use calendar years, when can the corporation deduct the expense if payment is made in the next year? Why? Would your response change if the attorney was an accrual-basis taxpayer? And what basis might the IRS have for disallowing the corporation’s deduction? What substantiation should the corporation supply to overcome the disallowance?

Explanation / Answer

when can the corporation deduct the expense if payment is made in the next year? Why?

They can deduct expenses in the current year even if payment made in the next year as they follow accrual method of accounting which allows recording expenses when they accrue even if paid later.

Would your response change if the attorney was an accrual-basis taxpayer?

No, it would be same

And what basis might the IRS have for disallowing the corporation’s deduction? What substantiation should the corporation supply to overcome the disallowance?

They may treat it as related party transaction unless prooved otherwise that the transaction took place at arms lenght price and no overpayment for services was made.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.