This week FedEx (NYSE:FDX), Walt Disney (NYSE:DIS) and Verizon (NYSE:VZ) joined the growing list of big companies, such as AT&T (NYSE:T) and Wells Fargo (NYSE:WFC), that have announced plans to financially reward employees with either one-time bonus payments, broad salary increases or other financial perks. So far, over 260 companies have dished out benefits and more are expected to do so. It's been good PR for them and of course for the president and the Republican Congress that passed the legislation.
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But did you notice something? Some companies were able to make this announcement almost immediately after the bill passed and before the year ended. But quite a few didn’t, including the nation’s largest employer, Walmart (NYSE:WMT). The mega-retailer announced on Jan. 11 that it would be giving out bonuses of up to $1,000 to some of its employees.
How are these corporations able to pay out bonuses for 2017 even though they didn't announce their intentions until 2018? Shouldn't these bonuses be a 2018 thing? Not at all. And not only that, many companies -- small, medium and large -- may not realize that they could be doing the same, right now, and reaping huge tax savings. Are you?
First of all, and before you go any further, talk to your accountant. I'm not your accountant, so I don't know everything about your business. But here are a few rules of thumb. If your business is not on the cash method of accounting -- therefore you use the accrual method -- then there is a very good chance that you can declare a bonus now for 2017 and take the deduction on your 2017 business tax return as long as you pay it out by March 15. The rule is further explained here.
This is really important because it can save you, your company and your employees a lot of money. It's all about timing. Tax rates -- both corporate and individual -- are much higher in 2017 than they are now in 2018 thanks to tax reform. Smart business people -- the executives and tax advisors at JPMorgan Chase (NYSE:JPM), Home Depot (NYSE:HD) and others -- know that the best strategy in this environment is to legally accelerate deductions in 2017 and defer as much income as legally possible to 2018. Why pay more when you don't have to?
Want to be even smarter? Don't pay the bonus in cash. Instead, contribute it to your company 401K or defined contribution plan for your employees. The same rules apply. But there are greater benefits. For starters, you're helping your employees save more for their retirement, and that's always a good thing. More to your benefit, the more you contribute for your employees, the more you're able to contribute for your own retirement without coming into restrictions imposed by these plans' discrimination rules. Everyone wins.
If you're running a business and you meet the above criteria, then there's still time to do exactly what all the smart people at the big companies have already done: declare a bonus and pay it out in the next six weeks. Your employees will be happy and hopefully work harder and think less about leaving your company (they’ll also have the income taxed at the lower 2018 rates). You will be happy because you'll be saving your company a lot of tax dollars. Your co-owners and shareholders will be happy because you're doing exactly what they're paying you to do: look after the best interests of their company.
Again, talk to your accountant. But if you get the green light for bonuses, then step on it.
Gene Marks is an author, columnist and President of The Marks Group, a ten-person technology consulting firm near Philadelphia. Gene is also a Certified Public Accountant and a small business expert.
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