Most accrual accounting businesses operate under the assumption that, so long as bonuses are paid to employees within two-and-a-half months of year end, they are deductible in the tax year in which the services were rendered.
However, the IRS has issued several rulings recently indicating this is not the case. According to the IRS, meeting the two-and-a-half months criterion is not enough. There are other steps that businesses must take if they want to deduct bonus payments made after year-end. The key issue? You must have a legal obligation as of the last day of your tax year to pay the bonuses that you have accrued.
Does your business plan on deducting bonuses earned in 2014-2015, but paid after year-end? If so, consider implementing the tips below to ensure the maximum deduction and no surprises in the new year.