If you are a business owner, you may be wondering if you can pay bonuses in 2018, but deduct them in 2017. Is it even possible?
The answer is Yes, but only if:
- Your company uses accrual-basis accounting.
- The bonuses were earned in 2017 and are paid by march 15.
- Bonus liability must be fixed by the end of 2017.
This process can be complicated, which is why you should talk to a experience CPA.
The all-events test
For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:
- All events have occurred that establish the taxpayer’s liability,
- The amount of the liability can be determined with reasonable accuracy, and
- Economic performance has occurred.
Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.
For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement.
The IRS goes to great lengths to categorize different types of income and treat them differently, and bonuses are another example of this. In the eyes of the IRS, bonuses are typically categorized as “supplemental wages.”
Some businesses can accelerate deductions for bonuses.
For more information, contact Allen Pierce, CPA at (479) 249-9916.
Bonuses deduction