VEBA deduction

[Gary]

Registered User

Group: Registered

Posts: 489

Joined: 23-October 98

Member No.: 521

A client has a VEBA.

The plan year-end and the cient's corporate tax year-end are both 8/31/07.

When must they make their employer contribution to the trust in order for it to be deductible for the 8/31/07 fiscal year?

By 8/31/07? Within 2 1/2 months of 8/31? Due date of tax return with extensions?

I believe a 419 welfare plan must make their contribution by 8/31/07 (assuming tax year end is 8/31/07) to be deductible, unless they use accrual employer accunting and then they have unti 2 1/2 months after tax year-end to make contribution.

Thanks.

[BeckyMiller]

See IRC Section 419(a)(2) - "if they would otherwise be deductible, shall (subject to the limitation of subsection (b)) be deductible under this section for the taxable year in which paid."

[Guest mjb]

Isnt the general rule for tax accounting that unless there is an express provision that allows deductions at a later date (e.g., by the date for filing tax return for contributions to a qualified plan) deductions are taken in the yr in which they are paid? Under 419(a)(2) accrual basis taxpayers are treated as cash basis taxpayers for deductions to a VEBA.

[Guest Harry O]

I would say the general rule depends upon which accounting method the employer has adopted. An accrual basis taxpayer can deduct an item if the all events test AND economic performance has occurred - this can be before the item is actually paid. Absent an express provision to the contrary, this would allow an accrual basis taxpayer to deduct a VEBA contribution prior to actual payment date if the taxpayer accrued a legal obligation to make the payment (that is, the employer satisfied the all events test). However, the accrual rules provide that economic performance does not occur until the item is deductible under Section 419. Since Section 419 provides that VEBA contributions are only deductible when actually made, economic performance and thus the accrual rules are not satisfied until the contribution is actually made. I believe there is an IRS general information letter to this effect issued in the early 90's.