The end of a year is a traditional time to pay bonuses to employees or give gifts and parties. In addition to receiving a tax deduction for these expenses, you also receive much goodwill from employees, especially around the holidays.
Employee/owner bonuses are an expense and can be deducted under certain circumstances. For example:
- S Corporations can deduct bonuses for shareholders and owners, as long as they own their shares at the time the bonus is paid.
- C Corporations can only deduct bonuses for shareholders/owners who have a 50 percent or higher ownership at the time the bonus is paid.
Bonuses to employees of all types of companies are deducible business expenses. But, bonuses to sole proprietors, partners, and limited liability company (LLCs) members are not deductible, because the owners/partners/members are considered by the IRS to be self-employed. This is one situation in which having a corporation and being an employee of that corporation might result in more tax deductions.
Holiday gifts and holiday parties may be deductible as long as they are not routinely/frequently given and are for the purpose of promoting goodwill.
Read more about Gifts, Awards, Bonuses and Taxes