Say Goodbye to the Bonus

Accrual basis taxpayers are generally permitted to deduct accrued compensation if it’s paid out within 2 1/2 months after year end.  In a recent Chief Counsel Advice, the IRS announced that they would not permit deductions for accrued bonuses if payment is contingent upon continued employment at the date the bonus is actually paid.  If you haven’t finalized your year-end bonus plan and expect a deduction, you should ensure that employees are not required to be employed at the payment date.  This may be difficult for many companies, as bonus policies are usually established well in advance of the year-end, but there’s still time to change it if you can.