Bonus Deductibility a Three-Prong Test
For accrual-basis taxpayers, a liability is incurred, and is generally taken into account for federal income tax purposes, in the taxable year in which:
- All the events have occurred that establish the fact of the liability,
- The amount of the liability can be determined with reasonable accuracy, and
- Economic performance has occurred for the liability (collectively, the “all events test”).
Rev. Rul. 2011-29 Addresses First Prong Only
Revenue Ruling 2011-29 addresses only whether the first prong of the all events test is met. The first prong of the all events test requires that all the events have occurred that establish the fact of the liability. Generally, all events occur to establish the fact of a liability when:
- The event fixing the liability, whether that be the required performance or other event, occurs, or
- Payment is unconditionally due.
Liability Is Established by the End of the Tax Year
Under the employer’s plan, its liability to pay a minimum amount of bonuses to the group of eligible employees is fixed at the end of the year in which the services are rendered. The employer is obligated under the program to pay to the group the minimum amount of bonuses determined by the end of the taxable year. Any bonus allocable to an employee who is not employed on the date on which bonuses are paid is reallocated to other eligible employees. Thus, the fact of the employer’s liability for the minimum amount of bonuses is established by the end of the year in which the services are rendered.
Employers Should Consult Their Tax Advisors
Vision Payroll recommends that employers consult their tax advisor with questions as to the deductibility of bonuses in a year other than when they are paid.