The provisions of Annual Bonus Deductibility are the reason for this. Yes, nobody would like to land oneself in accounting issues, but although Annual Bonus Deductibility errors are committed unwillingly, many accounting, tax, legal and HR professionals all over America end up facing a mess.
Date of employment is the issue
The primary reason why this happens is that many bonus plans provide that bonuses attributable to Year 1 will be paid early in Year 2, but only to participants who are employed on the date of payment. This is where the problem arises –this provision tends to create a problem with the deduction timing.
Annual Bonus Deductibility has scope for many confusions and misconceptions, which accounting professionals have to address. There are enough reasons for which a company would want to require an employee to remain employed until the actual payment date of an annual bonus in order to receive that bonus (as opposed to paying bonuses to anyone employed on December 31 of the prior year).
When March 15 approaches…
Another source of problem for accounting professionals dealing with Annual Bonus Deductibility is that even the common practice employed by most corporate firms to help employees to allow their tax deduction for the previous year; may not be sufficient to ensure that the bonus for the previous year is deducted! The timing of deduction depends on when the bonus is paid to the employee. Just paying it by March 15 of the next year is not enough.
Other factors such as FIN 48 and 409A, which are important provisions, need to be comprehended. These and other related points will have to be very clear in the minds of accounting professionals, or they end up creating a huge problem out of Annual Bonus Deductibility.
Typically, professionals need to be aware of these issues:
o Typical provisions of annual bonus plans
o Internal Revenue Code Sections governing the timing of deductibility
o Alternative means of satisfying the Code requirements
o Code Section 409A traps
