Deducting Bonuses Paid After Year-End

Share Article

Jonathon Schumaker, CPA at UHY Advisors MI, Inc. discusses how businesses will often pay bonuses to employees within the first few months of the year-end allowing for a deduction in the year the bonus is earned.

News Image

Businesses will often pay bonuses to employees within the first 2 1/2 months of year-end allowing for a deduction in the year the bonus is earned. This practice used to reward and maintain key individuals has also become an important component of year-end tax planning. In most instances, it is advantageous for the company to take the deduction for the bonuses in the year earned as opposed to the year paid. Additional guidance has been released covering three scenarios where taxpayers are not able to deduct bonuses until the year in which they are paid.

In order to deduct an accrued liability paid within 2 1/2 months of year-end, the Internal Revenue Service (IRS) has followed an “all events test” in which the event fixing the liability has occurred or the payment is due, whichever is earliest. In recently released IRS field attorney advice, the proper tax treatment is discussed.

The first scenario involves a taxpayer whose bonus plan allows the company to modify or eliminate the bonuses at any time prior to payment. Since the company retains the right to eliminate or modify the bonuses at any time prior to payment, there is no legal obligation to pay the bonuses. In this scenario, the bonus is deductible in the tax year in which it is actually paid.

In the second scenario, the amounts paid by the taxpayer must be approved by the board of directors before being paid. Similar to scenario one, no legal obligation exists since the board of directors has the ability to reject or modify the bonus payments.

The final scenario in the release covers plans where employee bonuses are computed based on an employee performance appraisal conducted after year-end. These bonuses are also not deductible until the year paid since the amount is unknown until the appraisal is conducted.

Employers should design their bonus or incentive plans to ensure the all events test is met allowing for the accelerated deduction. Here are some tips to make sure your plan qualifies:

  •     Make the plan based on financial data since the obligation will be determinable at year-end
  •     Make the individual participant rights to a bonus vest at year-end. Requirements that the employee retain employment when the bonus is eventually paid with not meet the all events test
  •     Set up fixed dollar bonus pools in which a specific amount will be allocated amongst employees who satisfy the plan’s terms

Taxpayers are encouraged to review their current incentive compensation plans to ensure they meet the all events test. For assistance, please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the web at http://www.uhy-us.com.

About UHY Advisors
UHY Advisors, operating in an alternative practice structure with UHY LLP, forms one of the largest professional services firms in the US. While that scale might provide confidence for some clients, others tell us our greatest value is the way we bring these resources to bear to help address today’s evolving business challenges. It’s a philosophy we call “The Next Level of Service”. To learn more visit http://www.uhy-us.com.

UHY Advisors provides tax and consulting services to a variety of sectors. UHY LLP, a licensed CPA firm, provides audit and other attest services to public and private companies. UHY Advisors FLVS provides forensic, valuation, intellectual property, electronic discovery and international arbitration services to law firms and their clients. Many of these services grew from client business needs and their requests for assistance in a variety of areas of expertise.

All of the above entities are members of UHY International, a global network of independent professional services firms that provide audit, tax and consulting services around the world. UHY International member firms comprise one of the top international accounting networks in the world. As a member firm, we provide our clients with resources in business centers strategically located around the globe. We are an active member in this organization with significant participation that brings the power of an international network to bear for our clients.

UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY LLP and UHY Advisors, Inc. are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. “UHY” is the brand name for the UHY international network. Any services described herein are provided by UHY LLP and/or UHY Advisors (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Jessica Dalessandro
UHY LLP
+1 (586) 843-2507
Email >
Visit website