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Delay year-end bonuses to next year

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in Small Business Tax

Usually, employee bonuses are deducted in the year they are paid and taxable in the year they are received. Example: If you pay out bonuses in January, you can’t deduct them on a 2008 return for a calendar-year corporation.

But a special exception applies to accrual-basis companies: The bonuses can be currently deducted if they’re paid within 2½ months of the close of the tax year. Employees are still taxed in the year bonuses are received.

Strategy: Fix bonus amounts well before Jan. 1. Then your company can deduct the bonuses on its 2008 return as long as they’re paid by March 16, 2009. (March 15 is a Sunday.) Maintain detailed corporate minutes to support your position.

Also, make sure the bonus arrangements satisfy recent regulations for “deferred compensation plans.” For instance, employees must sign off on the deal.

Tip: This special exception can’t be used for bonuses paid to majority shareholders of a C corporation, owners of an S corporation or a personal service corporation.

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