There aren\u2019t too many things businesses can do after a year ends to reduce tax liability for that year. However, you might be able to pay employee bonuses for 2018 in 2019 and still deduct them on your 2018 tax return. In certain circumstances, businesses can deduct bonuses employees have earned during a tax year if the bonuses are paid within 2\u00bd months after the end of that year (by March 15 for a calendar-year company).<\/p>\n
Basic requirements<\/strong><\/p>\n First, only accrual-basis taxpayers can take advantage of the 2\u00bd month rule. Cash-basis taxpayers must deduct bonuses in the year they\u2019re paid, regardless of when they\u2019re earned.<\/p>\n Second, even for accrual-basis taxpayers, the 2\u00bd month rule isn\u2019t automatic. The bonuses can be deducted on the tax return for the year they\u2019re earned only if the business\u2019s bonus liability was fixed by the end of the year.<\/p>\n Passing the test<\/strong><\/p>\n For accrual-basis taxpayers, a liability (such as a bonus) is deductible when it is incurred. To determine this, the IRS applies the \u201call-events test.\u201d Under this test, a liability is incurred when:<\/p>\n Generally, the last requirement isn\u2019t an issue; it\u2019s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.<\/p>\n For example, many bonus plans require an employee to still be an employee on the payment date to receive the bonus. Even when the amount of each employee\u2019s bonus is fixed at the end of the tax year, if employees who leave the company before the payment date forfeit their bonuses, the all-events test isn\u2019t satisfied until the payment date. Why? The business\u2019s liability for bonuses isn\u2019t fixed until then.<\/p>\n\n