IRS Changes Rules Of Year-End Bonuses

In a new ruling, the IRS has made it easier for companies to deduct year-end bonuses.

The ruling allows an employer using an accrual method of accounting to take a deduction in the current year for a fixed amount of bonuses payable to a group of employees, even though the employer does not know which of the employees will receive a bonus or the amount of any particular bonus until after the end of the taxable year.

In other words, the entire amount of the bonus pool will be paid to members of the group of employees in the following year but, at the end of the current year, the employer does not yet know which particular employees will receive any bonus or how much each will receive.

To secure the deduction in the year of accrual, the bonus pool must be fixed in the year of accrual and must actually be paid within the first two and one-half months of the subsequent tax year.

Read more in Revenue Ruling 2011-29.

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