In 2007, I earned most of my income from my own consulting business, which was a sole proprietorship I established in 2006. When I paid my 2006 taxes (and again in 2007), I indicated that this business (the income from which I reported on Schedule C) used the accrual method. I did this because there were some expenses of the business I knew I would pay in a subsequent year that I wanted to claim in the year incurred.

In any case, in 2007 I knew that I would be earning considerably more than I did in 2006. As a result (being too smart by half), I did not make significant estimated tax payments for state or federal taxes, knowing that as long as I made estimated payments at least equal to my total tax obligation in 2006, I would not be penalized. Unfortunately, this meant I had a huge tax bill when I filed my returns in April 2008.

Ooops. Now it is 2009, and I am just finishing my 2008 tax returns. I am noticing that I will have to pay AMT in 2008 because the state tax deductions (for the 2007 tax payments made when I filed my returns in April 2008) are reducing my 2008 tax burden below the AMT minimum. Thus the AMT is kicking and I am effectively losing these deductions.

My question: Since my consulting business was technically on the accrual basis (and I made that election at the time), can I recast my 2007 state tax payments (which were actually made in 2008) as having been made (consistent with accrual accounting) at the time the expense was incurred (i.e. in 2007). Specifically, can I file an amended 2007 1040 claiming the 2007 state tax deductions in 2007 and thus avoid the AMT in 2008?

Thanks for any reply.

Perhaps a little late on the reply here. Since it is now the 15th. (I just finished my 2008 also. I'd hoped doing an extension would allow me more time, and in the end I left it until the last minute anyway. LOL.)

Anyway... tricky one. I am not a tax expert, so what the IRS rules say and what you can manage to get away with could be two different things. (But I didn't say that.)

Go here first:
Publication 535 (2008), Business Expenses (http://www.irs.gov/publications/p535/ch05.html#en_US_publink1000142090)
Basically just note the first two sentences. You elected to do your bookkeeping on an accrual basis -- note you still have to do taxes on a cash basis, though there is the exception under the "recurring items" rule. So off to Pub 538.

Publication 538 (3/2008), Accounting Periods and Methods (http://www.irs.gov/publications/p538/ar02.html#d0e1351)
Scroll down to about halfway through the page where it says Expenses. Then down to taxes. Taxes tend to be done on a cash basis. I don't know why "economic performance" for taxes is based on when you pay them. But a business can count them on accrued if they can be considered on a recurring basis. But then keep scrolling down some more until you get to the recurring items section.

Note the dates. i.e. it's too late.

Besides, they aren't going to like it if you do cash basis one year and accrued the next, just to make your taxes come out the way you want. To be recurring, it has to be recurring, and you'll keep it on an accrued basis. (As in, you'd count 2008 as accrued also, meaning that expense is going right back in there anyway.)

Really, you probably should've just done it accrued to begin with.

As a side note... it just kills me when people talk about all the so-called loopholes the "rich" people can take to get out of taxes -- because none of them have heard of the AMT.