An employer cannot deduct cash bonuses in the year in which its employees perform the services giving rise to the bonuses, but must wait until the following year when the bonuses are paid, under bonus plans with several fairly typical features, according to a recently released Internal Revenue Service chief counsel memorandum (Number 20134301F), dated Sept. 18, 2013. The memorandum illustrates the types of unresolved contingencies that may remain at the end of the year in which employees work to earn their bonuses and delay the employer’s deduction until the following year when the bonuses are paid and the contingencies resolved. Although the IRS memorandum applies only to the taxpayer described in the memorandum, and cannot be used or cited as precedent by others, the memorandum nevertheless provides insight on the IRS’s current views on these matters.
The employer in this case maintains several bonus plans. Bonuses are based on the attainment of various performance targets which are approved by a committee of the employer’s board of directors in the first quarter of the fiscal year to which the bonuses relate. Bonus payments require committee approval, which occurs after the end of the applicable fiscal year. Some of the bonus plans take into account an employee’s individual performance appraisal, which can increase or decrease the bonus. Such performance appraisals are also completed only after the end of the applicable fiscal year. Some bonus amounts are subject to discretionary adjustments by the committee after the end of the fiscal year. Each of the plans reserves to the employer in plain and direct language the right to unilaterally modify or eliminate the bonuses at any time for any reason or no reason prior to payment...
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