Our company is cash basis. So employer is going to contribute 10K, employees are going to contribute 20K for 401K but the transaction will happen in 2022. Do I still make journal entry as of 12/31/2021 even we are cash basis? Or do we record the actual transaction day?
You may want to check with your CPA to confirm but §404(a)(6) of the Internal Revenue Code states:
a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).
Therefore, yes, the contributions, if they are made by your filing deadline in 2022, should be dated 12-31-21 so they can be deducted on your 2021 return and reflect on your 2021 financial statements. This applies to both cash and accrual basis taxpayers. The only issue is that the underlying wages for the contributions have to be earned in 2021.
@RainflurryRE: "Therefore, yes, the contributions, if they are made by your filing deadline in 2022, should be dated 12-31-21 so they can be deducted on your 2021 return and reflect on your 2021 financial statements."
Why? While the employer can attribute contributions to the tax year 2021, the regulation doesn't appear to say anything GAAP accounting for them (which would be inappropriate for the IRS to do.) The 401k provider won't be back-dating the receipt of the contributions. There doesn't seem any reason for the company to do so. Also, as they're likely writing a check now for the contributions, back-dating the check to last year seems iffy to me. That's not what happened...
The actual dates of the contributions aren't what counts. Instead, it's the year they're attributed to. In our case when this happens we have to contact the 401k provider and have them attribute select contributions to the prior year - otherwise they'd count for the year they were receipted.
There's nothing improper with the way you suggested and maybe your way is a better way to go.
I'm certainly not suggesting back-dating the check.
This is a QB forum, so it's difficult to imagine anyone needing to prepare GAAP-compliant financial statements posting here. Besides, GAAP does not apply to cash basis taxpayers as is the case here. There would be nothing improper about posting the expense on 12-31-21 to an accrued expense account and then paying it out of that account in 2022. Yes, this is a cash basis taxpayer using an accrued expense account but, that's no more inappropriate than a cash basis taxpayer paying for an expense in 2022 and deducting it on their 2021 return. It's my opinion that, for non-GAAP entities, your financial accounting and your tax accounting are essentially the same.
I think we both agree this is an expense that can be deducted on their 2021 return but I think posting it as of 12-31-21 aligns the financial statements with the return and reduces the chance of the deduction being missed. That's just my $.02 and, as mentioned earlier, it may not be the best way to go.