Here’s, what sounds like, a trick question: Can a company deduct pay before paying it? Usually the answer is no. Sometimes, though, a tax deduction can come first and the pay can be handed over months later.
According to a Forbes article, for pay and bonuses, the IRS has ruled that an accrual-method employer can deduct bonuses payable to a group of employees, even though it does not know the identity of any particular bonus recipient or the amount payable to that individual until after the end of the tax year. As long as the money won’t revert to the employer, it’s proper to deduct the bonuses for tax purposes.
An important 1986 Supreme Court case set the ground work for this IRS rule. In United States v. Hughes Properties, the Supreme Court held that a casino operator is allowed to deduct guaranteed progressive slot machine jackpots even though the jackpots had not yet been won by casino patrons. The Court reasoned that since the casino had a fixed obligation to pay the guaranteed amounts, its liability was established, even though it didn’t yet know who the jackpot recipients would be. Using cases like Hughes and others following it, the IRS now says that as long as an amount will be spread across a group of eligible employees (like jackpot recipients), with no amounts coming back to the company, it’s OK to deduct it for taxes purposes.
If you have any employment related questions, contact the Harman Firm.