Payroll accrual

[ILLMAS]

TP borrowed a good sum of money during the year from his business, TP goal was to repay it back before the year ended, that didn't happened and I wanted to see if I can convert the loan into payroll, accrue it as of 12/31/2016 and have the payroll company calculate the payroll taxes and pay it this year?

[jklcpa]

No, payroll to a related party can't be accrued. It's covered in sec 267.  They are deductible in the year paid.

Code sec is 267 that puts limits on related party transactions and converts those transactions to a cash basis so to match the transaction in the same reporting period as the cash basis owner. A quote taken from another source: "The related party rules under IRC S. 267 require the matching of income and deductions arising from transactions between related parties. Related parties include individuals owning more than 50% in value of the outstanding stock of the company. The law requires that even if all events have occurred to fix the liability and the economic performance rules are met, the deduction may not be claimed until the year in which the related party recognizes the income. Thus, in the instance of a bonus payment to a greater than 50% shareholder, the amounts will not be deductible by the company until the period in which the income is recognized by the shareholder."