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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Can I capitalize the commission/bonus paid to an employee who

Resolved Question:

Can I capitalize the commission/bonus paid to an employee who successfully retained existing business when the customer wanted to cancel their contract? i.e., we have a signed contract with a 6 year term - customer is 2 years into that term and have now stated they want to cancel - employee contacts customer and works out any issues which retains the business - we pay that employee $$ which represent the "save"
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

No, would completely run against the grain of preparing and using
assets under GAAP.

GAAP defines a company's assets as the things it owns or controls and that have a measurable and predictable future economic value. If something doesn't fit that description, it can't be capitalized.

Further, the IRS would probably take the position (applying the doctrine of substance over form) that not only would this artificially boost the company's value by putting more assets on its balance sheet, it would also artificially boosts the company's profit by reducing expenses.

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities.

But here, you're not attributing cost to a resold inventory item or manufactured good.

This is clearly compensation.

Lane

Customer: replied 1 year ago.

 


Thank you - to confirm - the "sales commission" paid for securing the contract qualifies to be capitalized however any additional expense to retain the business does NOT qualify

Expert:  Lane replied 1 year ago.

No, Wages, salaries, Utilities, maintenance, executive salary, custodial wages, sales commissions and property taxes are examples of period costs.

Unless you can categorize the commission as part of a star-tup cost of an asset, like we see sometimes now in software development (not sales. but pre-release development) compensation (sales commissions, etc) are an expense.

See this: as an excellent, readable piece.

If you want the IRS guidance, read section 162 of IRC.

Sorry

Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3898
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.


Sorry, here's the article I referenced:

http://www.ehow.com/info_8166969_capitalization-project-vs-operational-expense.html

Lane
Expert:  Lane replied 1 year ago.

Thanks.

Sorry to be the bearer of bad news, but this is an area the IRS really scrutinizes.

Hopefully, having the fact will help you to see around a few corners.

Thanks again,

Lane

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