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Annual Incentive Payments and IRS Revenue Ruling 2011-29


The IRS issued Revenue Ruling 2011-29 yesterday which deals with the deductibility of annual incentives, or the annual bonus. The ruling will allow employers using an accrual method of accounting to take a deduction in the current year for bonuses payable in the following year.  Michael B. Melbinger of Winston & Strawn LLP, wrote a very informative blog post on the issuance called "IRS Issues Important Ruling on the Proper Timing of Employers' Deduction of Annual Bonus Payments."

Some of the important points to draw on Revenue Ruling 2011-29 are:

1) The ruling states that bonuses payable are accruable for Federal income tax purposes even if the employer cannot determine the eligible employees and their respective bonus amounts until after the end of the taxable year.

2) In order to take this tax deduction in the current year, the employer must properly communicate the incentive compensation plan to all employees and appropriately determine the total amount of bonuses through a formula prior to the end of the taxable year.

3) Any change in the treatment of bonuses to conform with this revenue ruling is considered a change in accounting method.


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