Generally, when the taxpayer receives income, it must accrue that amount, unless the receipt is subject to substantial limits or restrictions or is a deposit or loan.
Whether the fact that the dispute did not arise until the year after the sale year affects the taxpayer's obligation to accrue the income in the tax year of sale (based on the tax-year concept of accounting);
For federal income tax purposes the California franchise tax continues to accrue
in the California tax year.
Holders of a contingent convertible debt instrument, however, must accrue
OID into income at the higher yield without receiving cash payments, regardless of their accounting method.
$4,500 of gross sales and includes $4,500 (less the corresponding cost of goods sold) in gross income in 2003, when W and Y settle their dispute.
Dividend Rate: Dividends accrue
on the Series A Preferred
1942) ("where interest actually accrues
on a debt of a taxpayer in a tax year the statute plainly says he may deduct it.
Letter Ruling (TAM) 9538007 held that taxpayers must continue to accrue
original issue discount (OID) on debt instruments even when the issuer's financial condition is such that there is no reasonable expectation that the accrued OID win be collected.
In these cases, interest accrues
only until the filing date for the tax year giving rise to the carryback.
Example 1: BA, an accrual-basis partnership, accrues
an otherwise deductible expense to partnership CA, which is on the cash basis.
Accounting method change: If a company is not currently deducting interest as it accrues
with respect to existing deferred compensation agreements that fit the profile in this case, the company most likely will have to request a change of accounting method from the IRS for current and new plans.
1272 provides for the current inclusion of OID in income as it accrues
regardless of a holder's method of accounting.