Press Room: Tax Release

November 11, 2011

New Revenue Ruling to Deduct Employee’s Bonuses

IRS resolves decades of uncertainty and clarifies the treatment of year-end bonus accruals, creating opportunities for favorable tax method changes.

In a reversal of position, IRS rules that it will permit employers to accrue employee bonuses even though the amount to be paid to specific employees is not known at the end of the year. IRS changes its long-held official position that the fact-of-the-liability prong of the all events test is met no earlier than when the identity of the eventual recipient of a bonus payment and the amount of that bonus is known.   

In Rev. Rul. 2011-29, IRS considered a situation in which the terms of the employer’s bonus plan required that an aggregate minimum bonus amount be determined by year-end with the allocation to individual employees to be determined after year-end. The plan also provided that any bonus allocable to an employee who had left the company before the bonus had been paid would be reallocated to other eligible employees. On these facts, IRS concluded that the minimum bonus amount determined under the plan could be accrued at year-end if paid by the fifteenth day of the third month following year-end. This ruling reverses a previous ruling which had reached a contrary conclusion, requiring that amounts to be paid to individual employees be determined by year-end.

The facts presented in the ruling are fairly typical of most bonus plans that have been amended to satisfy the all events test and thereby qualify for current tax deduction. The conclusion reached has long been considered the correct treatment based on the Supreme Court’s decision in U.S. v. Hughes Properties, Inc. Nevertheless, this ruling is much appreciated guidance that should resolve unnecessary controversy with IRS and questions about disclosure on Schedule UTP. IRS indicates it will allow an automatic accounting method change to implement the method permitted in this ruling. WTAS can assist with these filings and with redesigning bonus plans to permit current deduction of bonuses.