October 2023 Question and Answer


We plan to revive employee bonuses at our pre-Covid levels this year. A business owner friend said we can deduct the bonuses for 2023 tax purposes but not actually pay them until 2024. Is this true?


Possibly. Your friend may be thinking of the “2-1/2 month rule.” Under it, an employer may deduct bonuses earned during a tax year if they pay the bonuses within 2-1/2 months after the end of that year.

But only accrual-basis taxpayers can benefit. Even if you are an accrual-basis taxpayer, you can’t deduct the 2023 bonuses in 2024 unless you fix your obligation to pay in writing before year’s end.