IRS: Certain Plan Provisions Affect Timing Of Bonus Deductions

In a field attorney advice memorandum (FAA 20134301F), the IRS analyzed an employer's tax deduction timing related to bonuses paid to employees. According to the facts of the memorandum, the employer sponsors multiple bonus plans that pay cash awards to employees.

To receive the bonuses, the employees must be employed on the last day of the taxable year, but not on the bonus payment date. The bonus payment date is after the end of the employer's taxable year, but within 2½ months after the end of the taxable year.  

Under the accrual method of accounting, for an employer to receive a tax deduction for bonuses in the year in which the bonuses are earned rather than the year in which the bonuses are paid, the bonuses must meet the "all events test" under Section 461 on the last day of the taxable year in which the bonuses are earned. The all-events test is met when (1) all events have occurred to establish the fact of the liability, (2) the amount of the liability