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Plus... Deducting Bonuses

Companies that offer year-end bonuses may not actually pay them until after year-end. Question: Can the bonuses be deducted in the year of accrual — before they are paid to employees?

Answer: Maybe, if the company uses the accrual method of accounting for tax purposes and certain tax law requirements are met. For one, the bonuses must be paid within the 2½-month period following the close of the tax year.

To secure the deduction, the company must authorize the bonuses and determine the amount to be paid before the end of the year. Where the bonuses are to be based on a formula, such as a percentage of company profits, the bonuses must be definitely determinable through the formula. Additionally, the formula must be established, and the employees must be notified of the percentage to be awarded, before year-end.

Other requirements apply.

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