All Events Test

A test that applies to accrual method taxpayers to determine when a liability is incurred and therefore deductible for federal income tax purposes. Under the accrual method of accounting, a liability is generally recognized for federal income tax purposes in the taxable year in which:

  • All events have occurred that establish the fact of the liability.

  • The amount of the liability can be determined with reasonable accuracy.

  • Economic performance has occurred with respect to the liability.

(Treas. Reg. § 1.461-1(a)(2).)

Section 461(h) of the Internal Revenue Code provides that if the liability of the taxpayer arises out of the provision of services to the taxpayer by another person (for example, an employee providing services to an employer), then economic performance occurs when the services are provided.

Generally all events have occurred that establish the "fact" of the liability on the earlier of the following:

  • The event fixing the liability occurs.

  • Payment is unconditionally due.

(Rev. Rul. 2007-3.)

While it is possible for the fact of liability to be established before an amount becomes due and payable, legal rights and obligations must exist. No deduction is allowed for anticipated expenses, no matter how likely they are to occur. (United States v. Gen. Dynamics Corp., 481 U.S. 239, 243 (1987).)

In the case of bonus liabilities, where certain conditions must be met after services are performed but before payment (for example, if under the terms of a company's annual bonus plan the bonuses are subject to the approval of the compensation committee), the conditions may prevent the liabilities from meeting the fact of liability and amount of liability prongs of the all events test until the year in which the conditions are satisfied (in this example, the year in which the approval is obtained). Recent informal guidance from the Internal Revenue Service highlights this issue (see IRS Field Attorney Advice (FAA) 20134301F).

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