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Deduct bonuses first, and then pay them later

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If your company uses the accrual method of accounting for tax purposes, you can deduct accrued year-end bonuses in the current year as long as they are paid within 2½ months of the close of the tax year. This provides a unique opportunity for calendar-year companies.

Strategy: Fix bonus amounts for the 2016 tax year. As long as you make sure the bonuses are paid by March 15, 2017 (assuming your company uses the calendar year for tax purposes), you’re entitled to the deduction in 2016.

This strategy also provides benefits for employees. They don’t have to pay tax on bonuses received in 2017 until they file their ’17 return in 2018,

However, the special deduction timing rule doesn’t apply to bonuses paid to majority shareholders of a C corporation or certain owners of S corporations or personal service corporations.

Tip: Provide details on bonuses in your corporate minutes.

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