General tax principle

[cpabsd]

Needing to do some research and hoping to get pointed in the right direction.  I was told by a retired CPA that there is a general IRS tax principle that if you have a contractual obligation for an expense, and due to no fault of your own it was delayed beyond the IRS timing for a transaction, the transaction would be considered timely because you would have to break the contract otherwise.  Not sure if this makes sense but would appreciate any guidance or pointing in right direction.  

[kathyc2]

I'm guessing you are referring to accrual basis taxpayers needing to actually pay out accrued expenses in the first 2 1/2 months of next year?

[DANRVAN]

27 minutes ago, cpabsd said:

Not sure if this makes sense but would appreciate any guidance or pointing in right direction.  

Can you give an example of what you are talking about?

[mcbreck]

I've been told in continuing education seminars and by outside auditors that it is reasonable to smooth out income and expenses if they are meant to be received or paid but are delayed slightly. For example you receive the January rent check which was due Dec 31st on January 2nd, it is okay to include it for tax purposes as having been received Dec 31st. That way each year gets 12 rent checks. Same as if a payment was supposed to be made Dec 31st but the bank didn't actually submit payment until Jan 2nd you can include it as having been paid Dec 31st so that you have 12 months of payments. It's reasonable and expected to smooth out the payments for short time period differences. And no I don't think you'll find that in the IRS Code.

 

If you are in a regulated industry it is very likely your regulator will not accept this timeline change.

[Lee B]

I can't recall that smoothing income and expenses is a tax principle.

It certainly wasn't part of my CPA Exam or my Enrolled Agent Exam.

However, it's certainly become part of what CFOs of publicly traded corporations do at the end of every month, quarter and year.

[Abby Normal]

Cash basis is pretty straightforward. Although, what typically happens at year end is back dating checks written after year end, and holding incoming payments until the following year. Not saying this is legal or correct. It's just reality.

[Sara EA]

I never heard of it either.  It definitely doesn't work in all areas.  Like taking a 529 plan or IRA distribution in Dec of one year to pay tuition in Jan does not alleviate the early distribution penalty. 

[cpabsd]

No I'm not referring to timing issues relating to cash basis or accrual basis transactions.  

Problem is with a taxpayer that started a 1031 exchange on 9/1/2021.  The property they replaced it with needed significant repairs which can be incorporated into the amounts for the replacement property.  However, all transactions are to be completed by 2/28/2022.  They have a contract to have all the improvements done and have paid for all supplies.  However, due to supply issues, the hurricane windows are not arriving until April.  Are there any general principals that would allow those expenses to be counted as part of the replacement cost or since it is actually being paid after 2/28/2022... is the taxpayer out of luck.  Replacement property is not going to be enough to cover the full cost of the sale, but also not wanting to pay tax on more than required.  Possibly could pay the contractor before 2/28/2022 but that involves a lot of trust as they could run off with funds and client is out of luck then.  Suggestions welcome along with any sites so I can look at the authoritative documents.

[Lee B]

1 hour ago, cpabsd said:

No I'm not referring to timing issues relating to cash basis or accrual basis transactions.  

Problem is with a taxpayer that started a 1031 exchange on 9/1/2021.  The property they replaced it with needed significant repairs which can be incorporated into the amounts for the replacement property.  However, all transactions are to be completed by 2/28/2022.  They have a contract to have all the improvements done and have paid for all supplies.  However, due to supply issues, the hurricane windows are not arriving until April.  Are there any general principals that would allow those expenses to be counted as part of the replacement cost or since it is actually being paid after 2/28/2022... is the taxpayer out of luck.  Replacement property is not going to be enough to cover the full cost of the sale, but also not wanting to pay tax on more than required.  Possibly could pay the contractor before 2/28/2022 but that involves a lot of trust as they could run off with funds and client is out of luck then.  Suggestions welcome along with any sites so I can look at the authoritative documents.

I am totally perplexed, "Why wasn't this post your original post?

[jklcpa]

3 hours ago, cpabsd said:

No I'm not referring to timing issues relating to cash basis or accrual basis transactions.  

Problem is with a taxpayer that started a 1031 exchange on 9/1/2021.  The property they replaced it with needed significant repairs which can be incorporated into the amounts for the replacement property.  However, all transactions are to be completed by 2/28/2022.  They have a contract to have all the improvements done and have paid for all supplies.  However, due to supply issues, the hurricane windows are not arriving until April.  Are there any general principals that would allow those expenses to be counted as part of the replacement cost or since it is actually being paid after 2/28/2022... is the taxpayer out of luck.  Replacement property is not going to be enough to cover the full cost of the sale, but also not wanting to pay tax on more than required.  Possibly could pay the contractor before 2/28/2022 but that involves a lot of trust as they could run off with funds and client is out of luck then.  Suggestions welcome along with any sites so I can look at the authoritative 

Only the portion installed within the 180 days would count. There are some special rules for exchanges involving build to suit property called "exchange accommodation titleholder" and the QI must hold the funds and title, because once client takes title the exchange is done. 

I don't usually post blogs, but this one has a lot of description and references for this.

https://www.accruit.com/blog/can-property-improvement-costs-be-part-1031-tax-deferred-exchange