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Year-end bonuses: tax strategy

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in Small Business Tax

Generally, your company may deduct bonuses in the year they are paid. For employees, the bonuses are taxable in the year they are received. For instance, you must pay out bonuses to employees before Jan. 1, 2010, to claim deductions for 2009. However, there’s a special rule for accrual-basis companies.

Strategy: Fix the bonus amounts now, but don’t pay them until next year. As long as the bonuses are paid within 2½ months of the close of the tax year—in other words, by March 15, 2010—you can still deduct them on your company’s 2009 return.

Your employees usually won’t mind getting a bonus in, say, January instead of December, because they can defer the tax on the bonus for an entire year. So everyone wins.

Caveat: The favorable 2½-month rule for accrual-basis companies doesn’t apply to bonuses paid to majority shareholders of a C corporation, or owners of S corporations or personal-service corporations.

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