Tax Pro Plus: Small Business Tax Tips - Accrued Bonuses

Deduct these expenses before they are paid

The IRS has ruled in favor of accrual-method businesses deducting unpaid bonuses at the end of the year. The company must pay the accrued bonuses within 2½ months of the end of its tax year.

There are other caveats with this deduction as well. The employee must be employed on the date the bonuses are paid and the company must be using an incentive-based bonus plan of which the employees are aware. The bonus plan must have an aggregate amount of the bonus payable fixed across a group of employees. However, the company does not need to know the identity of any particular bonus recipient and the amount payable to that employee until after the end of the taxable year.

If this sounds like a feasible option for your company, talk with your tax professional.