Generally, a calendar-year company deducts employee bonuses in the year they are paid, while the bonuses are taxable to the employees in the year received. For instance, you must have paid out year-end bonuses before Jan. 1, 2012, to deduct them on your 2011 return. But there’s a special rule for accrual-basis companies.
Strategy: Pay the bonuses this year, but take a deduction on the return for last year. As long as the bonuses are paid within 2½ months of the close of the tax year—in other words, no later than March 15, 2012—they are deductible on your 2011 return.
Typically, your employees won’t mind getting a bonus in, say, January instead of December, because this defers the tax on the bonus for an entire year. Result: Everyone wins.
Now a new ruling might help. The IRS says that an employer can claim a current deduction for bonuses payable to a group of employees, even though the employer doesn’t know the identity of specific recipients and the exact amount payable to each of those recipients until the tax year is over. (IRS Revenue Ruling 2011-29) In other words, if you were obligated to pay the bonuses last year, but the recipients and amounts aren’t determined until this year, the bonuses can still be deducted on your 2011 return.
Tip: The deduction rule doesn’t apply to bonuses paid to majority shareholders of a C corporation or owners of S corporations or personal service corporations. Bonuses received by these employee-shareholders are deductible in the year paid.