The Internal Revenue Service has issued a revenue ruling permitting an employer that is using an accrual method of accounting to take a deduction in the current year for a fixed amount of bonuses payable to a group of employees, even though the employer does not know which of the employees will receive a bonus or the amount of any particular bonus until after the end of the taxable year.
Under Revenue Ruling 2011-29, employers could take a deduction on the bonuses, whether or not the employees has determined who will receive the bonus.
“In other words, the entire amount of the bonus pool will be paid to members of the group of employees in the following year, but at the end of the current year the employer doesn’t yet know which particular employees will receive any bonus or how much,” the IRS said when issuing the revenue ruling Wednesday.
The revenue ruling could prove helpful in particular to financial firms that typically award year-end bonuses to high-performing employees. Wall Street banks are expected to pay lower year-end bonuses this year as a result of the trading volatility this past year. Other types of companies could also benefit. In the revenue ruling, the IRS cited court precedents involving the Washington Post Company and casino operator Hughes Properties.
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