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, in order to deduct year-end bonuses in 2013, you must pay them before Jan. 1, 2014. But there’s a special rule for accrual-basis companies.
Strategy: Fix the bonuses this year and claim a current deduction even though the bonuses are not paid until early next 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 17, 2014 (March 15 falls on a weekend), for a calendar-year taxpayer—they are deductible on your business’s 2013 return.
Typically, your employees won’t mind getting a bonus in, say, January instead of December, because this defers their tax bill for the bonus until next year. Result: It’s a win-win situation.
A semi-recent ruling might also help your firm. 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 those recipients until the tax year is over. (IRS Revenue Ruling 2011-29) In other words, if you are obligated to pay the bonuses this year, but the recipients and amounts aren’t determined until early next year, the bonuses can still be deducted on your 2013 return.
Caveat: The special deduction rule for accrual-basis corporations 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 employee-shareholders, such as yourself, are deductible in the year paid.
Tip: You might defer a bonus until 2014 anyway if you’re trying to reduce your personal 2013 tax liability.