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Accrued bonuses can be deducted for tax purposes if certain criteria are met:

  • Must be paid within two and a half months after year end
  • The bonus is determinable within reasonable accuracy
  • Economic performance has occurred within the tax year
  • All events have occurred that "establish the fact" of the liability before year-end

Below are some techniques to "establish the fact" of the bonus accrual:

  • If there is a separate bonus plan for each employee, pay that amount to each employee regardless of employment status. If a non-active employee is not paid on the payout date, the employer has not "established the fact" of the bonus liability.
  • If you only want to pay active employees on the payout date, during the tax year, you could state the total bonus amount and allocate that amount to the active employees on the payout date. 
  • Documentation of the methodology for the bonus accrual calculation should be done before year-end.

Below are some situations that may cause the bonus accrual to not be deductible as the bonus liability was not "established as fact":

  • If the bonus accrual amount is determined or significantly changes after year-end.
  • If the employer has the ability to adjust or eliminate the bonus after year-end; if the employer is not obligated, then the accrual is not deductible. 

For more information, please contact your UHY LLP professional in one of our many locations