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Accrued Commission

Four years ago, my company accrued about $50K in commissions for our Director of Operations at the time as a bonus to be paid later. There was nothing in writing that made him qualify for that bonus, except this was a verbal communication between the CEO and him. The company will now be dissolving within the next 12 months and the previous Director of Operations has signed an Exit Plan that nulls any previously promised commissions, bonuses, etc. My question: What's the best way to write off the liability from the company books? The company is a LLC, so writing the expense off will increase the Net Income, which will negatively impact the owner's taxes. Are there other ways to do this without impacting the bottom line?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

There is no way to write-off a previously accrued liability (expense) but to take income.
An alternative is to pay it out to 3rd parties (staff) and transfer the taxable aspect to them (and good will).

Anonymous
(Director of Finance) |

Interesting. I like the alternate option. Can I pay that to the Owner against Owner loans?

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon
Actually, the owner gains out of this. He saves $50k less the taxes on it.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |
Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

Take a look back at how the accrual was treated for taxes when expensed. It was never paid by the following March 15, so it likely should have been disallowed as a deduction back then. Check with your tax CPA and what tax basis you are on. Maybe there is no tax issue. And as for the dissolution, positive or negative, who cares? It was a phantom liability anyway. The shareholders and/or creditors get was coming to them anyway whatever the income statement says.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

Accounting/financial reporting - write off the accrual as a reduction in expense, using the same expense account that was originally charged when the accrual was originally established.
Tax - as Lee Andrews points out, since the bonus was never paid, it should not have been deducted for taxes so the reversal would not create income. That is, it's a book/tax difference on Schedule M.

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