Annual Bonus Deductibility - Including 409A issues
Overview:
Deducting annual bonuses in the wrong year (generally one-year too early) is one of the most common mistakes made by tax, accounting, legal and human resources professionals in corporate America.
Generally, an employer is permitted to deduct in its Year 1 tax year, bonuses that it pays within the first 2 ½ months of Year 2 (for example, for a calendar-year employer, payment by March 15, 2014, for a 2013 tax deduction). However, that grace period only applies if "all events" fixing the obligation have occurred by the end of Year 1. To the extent Year 1 bonus payments are contingent upon future service in Year 2 (i.e., an employee must remain employed until the payment date), the all events test may not be satisfied and the deduction cannot be taken until the Year 2 tax year.
There are good reasons why a company would want to require an employee to remain employed until the actual payment date of an annual bonus in order to receive that bonus (as opposed to paying bonuses to anyone employed on December 31 of the prior year). However, a company that want to impose this requirement and achieve early deductibility must overcome some hurdles.
Why should you attend: Is your company deducting its annual bonuses one year too early? Many bonus plans provide that bonuses attributable to Year 1 will be paid early in Year 2, but only to participants who are employed on the date of payment. This provision could create a deduction timing trap for the unwary.
Areas Covered in the Session:
- Typical provisions of annual bonus plans
- Advantages of a requirement of employment through the payment date
- Internal Revenue Code Sections governing the timing of deductibility
- Alternative means of satisfying the Code requirements
- Code Section 409A traps
Who Will Benefit:
- Director of Human Resources
- Director of Compensation and/or Benefits
- Vice President
- Lawyers and accountants working with compensation
- General counsel
- Chief Accounting and Finance Officers