When Is an Accrued Bonus Fixed and Determinable?

An accrued bonus is fixed and determinable when, by the last day of the tax year, your company has an unconditional legal obligation to pay it and a method already in place to calculate the amount with reasonable accuracy. Those are the first two prongs of the IRS’s All Events Test, and together they decide whether an accrual-basis employer can deduct the bonus in the year employees earned it rather than the year the check clears.

What “Fixed” Means for a Year-End Bonus

A bonus liability is fixed when the obligation to pay is unconditional at year-end. If any future event could still eliminate the company’s duty to pay, the liability is not established, and the deduction fails for that year.¹

For a calendar-year business, the commitment must be legally binding before midnight on December 31. A verbal promise from a manager is not enough. The IRS looks for evidence of formal corporate action, usually a board resolution or compensation committee decision, that creates an enforceable obligation.² The program’s terms should also be communicated to eligible employees when they become eligible and whenever the program changes.

Two common structures break the “fixed” prong:

A forfeiture clause requiring the employee to still be on the payroll on the payment date. If an employee hired in October has to remain employed through March to collect, your December obligation is contingent on their continued employment, not fixed.
Retained discretion. If the CEO or compensation committee can still reduce or eliminate individual awards after December 31, or if the plan requires post-year-end board approval to finalize, the obligation does not yet exist as a matter of law.

The test is whether a court could enforce the promise on December 31, not whether payment is likely.

What “Determinable” Means

The second prong doesn’t require you to know the exact dollar figure on December 31. It requires a reliable method for calculating the amount, locked in place before the year ends.³ A bonus defined as 10% of net revenue is determinable even if the final accounting isn’t done until February, because the formula is fixed and the inputs are objective.

Workable formulas tie the bonus to a specific, measurable metric: total sales volume, operating income, EBITDA, units shipped. A bonus left entirely to the post-year-end subjective judgment of a committee does not qualify, because no formula constrains the outcome.

Reasonable estimates are acceptable when the underlying data is sound. If year-end revenue is $9.8 million and the final audited number lands at $10.1 million, the estimate was reasonable and the deduction holds. What fails is a bonus amount that depends on unknowable future events, such as next year’s stock price or a pending regulatory decision.

Bonus Pools: Keeping the Aggregate Fixed

Many companies set up a bonus pool rather than naming individual award amounts before year-end. The IRS allows this. A deduction is available even when the employer doesn’t yet know which specific employees will receive how much, as long as the minimum total payable to the group is established by year-end.²

The pool amount can be set either through a formula based on year-end financial results or through a board resolution adopted before December 31. The point that trips plans up is what happens to a departing employee’s share. If that person’s allocation reverts to the company, the aggregate liability was never truly fixed, because the total payout can shrink. If forfeited amounts are redistributed among the remaining eligible employees, the pool stays intact and the deduction survives.²

A plan that says departing employees forfeit their share without specifying where the money goes reads as reducing the employer’s total obligation. Drafting the plan to redirect forfeited amounts to the remaining participants eliminates that problem.

The Third Prong: Economic Performance

The All Events Test actually has three prongs, not two. The third is economic performance. For liabilities arising out of services provided to the taxpayer, economic performance happens as those services are rendered.¹ Because year-end bonuses reward work already performed during the tax year, economic performance is almost always complete by December 31. This prong rarely blocks a bonus deduction. The real work of “fixed and determinable” lives in the first two.

Fixed and Determinable Alone Is Not Enough

Clearing the All Events Test gets you to the starting line. Two more rules decide whether the deduction actually lands in the earning year.

The 2.5-Month Payment Rule

Even a bonus that is fixed and determinable at year-end must be paid within 2½ months after the end of the employer’s tax year. Compensation received after that window is presumed to be deferred compensation.⁴ For a calendar-year company, that date is March 15 of the following year. In 2026, March 15 falls on a Sunday, so the effective deadline is Monday, March 16, 2026.

If a non-related employee is paid after the window, the deduction doesn’t vanish. It moves to the year payment is actually made. That one-year shift can be expensive when it drags a large deduction out of a high-income year.

Related Parties Override the Test

When the recipient is a related party, the All Events Test and the 2.5-month deadline both lose their force. IRC Section 267 imposes a strict matching rule: the accrual-basis employer cannot deduct the bonus until the tax year in which the cash-basis recipient includes it in income.⁵ Accruing a $50,000 bonus in December and paying it the following June pushes the deduction into that following year, no matter how fixed and determinable it was.

Who counts as a related party depends on your entity:

C corporations: an individual who owns, directly or indirectly, more than 50% of the stock. Siblings (including half-siblings), spouse, ancestors, and lineal descendants are included in the ownership calculation.⁵
S corporations: any shareholder, even one holding a single share. There is no 50% threshold.⁶
Partnerships: any person who directly or indirectly owns any capital or profits interest.⁵

The S corporation rule catches more owners than they expect. A 5% shareholder who receives a year-end bonus is a related party. Constructive ownership rules reach further still: stock owned by a family member can be attributed to you even when you hold no shares yourself.⁷

Proving Fixed and Determinable on Audit

The IRS doesn’t take your word for any of this. You need a paper trail that shows the liability existed at year-end, the amount was calculable from a formula set before year-end, and employees knew about the program. Revenue Ruling 2011-29 points to the records that matter:

A board or committee resolution adopted before December 31 that commits the company to paying bonuses and establishes either the total pool or the calculation formula.²
A written formula tied to objective financial data. The formula can reference numbers that aren’t finalized until later, as long as the formula itself doesn’t change after year-end.
Written notice to employees of the general program terms when they become eligible and whenever the program is modified.²
Payment records showing the dates and amounts actually paid.

An undocumented bonus invites reclassification. Even when every legal requirement was technically met, the inability to prove it through contemporaneous records gives an examiner a reason to push the deduction into a later year. A few hours of formality before year-end protects a deduction worth far more than the time it takes.

1
Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction
2
Internal Revenue Service. Revenue Ruling 2011-29
3
Internal Revenue Service. Revenue Ruling 98-39
4
GovInfo. 26 CFR 1.404(b)-1T – Deduction Limitation for Deferred Compensation
5
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
6
Internal Revenue Service. An S Corporation Cannot Deduct Accrued Expenses for Related Parties
7
eCFR. 26 CFR 1.267(c)-1 – Constructive Ownership of Stock