Deductibility of Bonuses Depends on No Contingencies in Bonus Plan

On December 4, 2009, the IRS released CCA 200949040. This release reminds taxpayers that bonus payments to be paid in the following year (for services performed in the current year) may not be deducted if the payment of the bonus is contingent on the employee being employed on the date of the bonus payment. In this case, the contingency (being employed on the date of payment) means that the bonus plan is not a fixed liability in the current year. Because it will not pass the “all events test,” the bonus is not deductible in the current year.

In order to deduct the bonus payments in the current year, taxpayers may want to amend their bonus plans to require that recipients be employed on December 31, 2009 (instead of the date of the bonus payment). To change the treatment of the bonus payment, this amendment must be made by December 31, 2009.

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If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Carl D. Fortner
Milwaukee, Wisconsin
414.297.5739
[email protected]

John B. Palmer
Chicago, Illinois
312.832.4575
[email protected]

Timothy L. Voigtman
Milwaukee, Wisconsin
414.297.5677
[email protected]

Michael H. Woolever
Chicago, Illinois
312.832.4594
[email protected]

Jason J. Kohout
Milwaukee, Wisconsin
414.319.7053
[email protected]

Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.