November 16, 2011
Authored by: benefitsbclp
The IRS recently released Revenue Ruling 2011-29 clarifying the deductibility of bonuses. The question posed in the Ruling was:
“Can I deduct a bonus in the current tax year if I know how much I will pay in bonuses by the end of the year, even if I don’t know who will get them until next year?”
The Facts: The more detailed facts are as follows:
A company (we’ll call it “X” to protect the innocent) uses an accrual method of accounting for federal tax purposes. X pays bonuses to a group of employees pursuant to a program that defines the terms and conditions under which the bonuses are paid for a taxable year. X communicates the general terms of the bonus program to employees when they become eligible and whenever the program is changed.
Under the program, bonuses are paid to X’s employees for services performed during the taxable year. The minimum aggregate amount of bonuses payable under the program to X’s employees as a group is determinable either (a) through a formula that is fixed prior to the end of the year, taking into account financial results as of the end of that year, or (b) through other corporate action, such as a resolution of X’s Board or Compensation Committee, made before the end of the taxable year, that fixes the total bonuses payable to the employees as a group. To be eligible for a bonus, an employee must perform services during the taxable year and be employed