As year-end approaches it is a good time to review the rules related to accrued wages.
In order for wages accrued but not paid at year-end to be considered an allowable cost for that year, the wages need to be paid within 2 ½ months of year end (March 15th). This includes payroll, incentive compensation, owner/management wages not paid in order to conserve cash flow (deferred compensation).
If owner/management has accrued compensation and wants to insure the cost is allowable, but at the same time not deplete cash, one option is to make the payments, and have the owner/management loan the money back to the company. However, keep in mind that the amount of money coming back to the company will be less than the amount paid since income payroll taxes will be withheld.
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