As year-end approaches, business clients should consider the benefit of including adjustments to income to preserve favorable estimated tax rules for 2016, deferral of certain advance payments to next year, and fine-tuning bonuses.
Accrual basis business can take a 2015 deduction for some bonuses not paid till 2016.An accrual basis business can take a deduction for its current tax year for a bonus not actually paid to its employee until the following tax year if:
(1) the employee doesn't own more than 50% in value of the business,
(2) the bonus is properly accrued on its books for the current tax year, and
(3) the bonus is actually paid within the first 2 1/2 months of the following tax year (for a calendar year taxpayer, within the first 2 1/2 months of 2016).
For employees on the cash basis, the bonus won't be taxable income until the following year. The 2015 deduction won't be allowed, however, if the bonus is paid by a personal service corporation to an employee-owner, by an S corporation to an employee-shareholder, or by a C corporation to a direct or indirect majority owner.
Accrual-basis taxpayers can defer inclusion of certain advance payments. Accrual-basis taxpayers generally may defer including in gross income advance payments for goods until the tax year in which they are properly accruable for tax purposes if the income inclusion for tax purposes isn't later than it is under the taxpayer's accounting method for financial reporting purposes.
An advance payment is also eligible for deferral—but only until the year following its receipt—if:
(1) including the payment in income for the year of receipt is a permissible method of accounting for tax purposes;
(2) the taxpayer recognizes all or part of it in its financial statement for a later year; and
(3) the payment is for (a) services, (b) goods (other than goods for which the deferral method discussed above is used), (c) the use of intellectual property (including by lease or license), (d) the occupancy or use of property ancillary to the provision of services, (e) the sale, lease, or license of computer software, (f) guaranty or warranty contracts ancillary to the preceding items, (g) subscriptions in tangible or intangible format, (h) organization membership, or (i) any combination of the preceding items.
The deferral method cannot be used for (1) rent (unless it's for items (c), (d), or (e), above), (2) insurance premiums, (3) payments on financial instruments (e.g., debt instruments, deposits, letters of credit, etc.), (4) payments for certain service warranty contracts, (5) payments for warranty and guaranty contracts where a third party is the primary obligor, (6) payments subject to certain foreign withholding rules, and (7) payments in property to which Code Sec. 83 applies.