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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13323
Experience:  15years with H & R Block. Divisional leader, Instructor
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Hi, our small company wants to make some bonus payments on

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Hi, our small company wants to make some bonus payments on top of the regular salary. May we somehow make the bonus payments next year and take the deduction as a business expense this year? I am told that we can. What do we need to do? We are an accrual basis company. 


Robin D :

Hello and thank you for using Just Answer,
When you can deduct an expense depends on your accounting method. An accounting method is a set of rules used to determine when and how income and expenses are reported.

Robin D :

Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them.
Under an accrual method of accounting, you generally deduct business expenses when both of the following apply.




  1. The all-events test has been met. The test is met when:




    1. All events have occurred that fix the fact of liability, and




    2. The liability can be determined with reasonable accuracy.






  2. Economic performance has occurred.



Robin D :

You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. If you pay the Bonus in the tax year then you cannot deduct the payment in another year.

Robin D :

Unfortunately you will need to keep both the bonus payments and the expenses in the same year.

Customer:

We are an accrual basis taxpayer, so does this make a difference?

Robin D :

It does for the other expenses but not for the employee payments.

Robin D :

Those are tied to the date of the payments to the employees.

Robin D :

You are very generous and I wish I could advise that you could do this.

Customer:

So is there no way we can structure our payment plan in such a way? What about if we have some sort of qualified deferral payment plan?

Robin D :

I am checking on any viable options, one sec please

Customer:

ok thanks

Robin D :

IRS Revenue Ruling 2011-29 addresses the requirements for accelerating bonus deductions, you still need to comply with several rules. You can claim the bonus accrual deduction for the performance year rather than the payment year only if:


• You use the accrual method of accounting,
• You establish minimum bonus amounts for the group of employees eligible for bonuses by the end of the tax year for which you’d like to take the deduction,
• When you pay out the bonuses, you reallocate any bonus set aside for an employee who is no longer with the company to other eligible workers,
• The bonus plan specifically identifies which employees are eligible to participate,
• You communicate the plan requirements to eligible employees before the end of the tax year,
• You establish the formula for calculating bonuses before the end of the tax year — preferably in a documented formula, and
• You pay bonuses by the 15th day of the third month after the close of the tax year.

Robin D :

Be careful. If you claim a deduction for bonus amounts that aren’t fixed at the end of the performance year — such as a bonus that you can increase or decrease at your discretion — the IRS may challenge the deduction.

Robin D :

The IRS considers a change in how you treat bonuses for tax purposes an accounting method change. This means your accountant will need to deal with the request from the IRS

Customer:

well what we want to do right now is

Customer:

make payments to 4 of the 5 people in our company, we are very small. i currently makes 500k, my assistant makes 100k, the other two employes makes about 200k. we want to make those annual payments, but on top of that we want to pay the same amount as a bonus

Robin D :

You have time to set this up for 2013 but not for 2012.

Customer:

so we know how much we are going to pay them, and if we get all this written out in some plan, and make the payments before march 15, it will be ok?

Robin D :

Did I lose you? The system said you disconnected.

Customer:

no i am still here

Customer:

so we know how much we are going to pay them, and if we get all this written out in some plan, and make the payments before march 15, it will be ok?

Robin D :

Well you would need to also ask for the change in accounting method so do not forget that part.

Customer:

we already use accrual method

Customer:

do we need to use cash?

Robin D :

I know but you have not been doing bonuses like this.

Customer:

the document said accrual method

Customer:

i see

Customer:

what will that change require?

Customer:

is this something that will require a full time accountant?

Robin D :

No it is so you can count the payments in the next year for the employees.

Robin D :

To get approval, you must file Form 3115, Application for Change in Accounting Method. You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures.
You presume to have IRS approval to change your method of accounting. The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures.

Customer:

ok

Robin D :

File with the 2012

Robin D :

This is all pretty complicated so make sure you do all you are supposed to do.

Customer:

are there anymore cases of whatever you send me earlier that i can read along these lines? would it be possible to see if someone have done this before?

Robin D :

It is pretty standard in the construction and real estate business. Any business that deals with having to do with counting the financials after the work.

Robin D :

Let me get the revenue ruling for you

Customer:

yes we are real estate as well

Customer:

what exactly is that, a revenue ruling?

Robin D :

That's good

Robin D :

http://www.irs.gov/pub/irs-drop/rp-11-29.pdf

Customer:

thanks you

Robin D :

You are most welcome

Customer:

is there anything else we should know or consider?

Robin D :

Not that i can think of right now. If something comes up just come back here and let me know.

Robin D :

Your positive rating is always thanks enough.

If you could also participate in the very short survey that Just Answer will send you by e-mail I would appreciate that very much.

Customer:

ok thank you

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