Timing Vital As Companies Set Bonuses, Spending Before New Tax Law

The timing of AT&T Inc.’s pledge this week to give $1,000 bonuses to more than 200,000 workers once President Donald Trump signs the tax overhaul may have saved it $28 million.

That is because committing to making the payment now could let it record the expense in 2017 for tax purposes. In AT&T’s case, that would mean a $70 million deduction under the existing 35% tax rate. By contrast, recording the bonus expense in 2018, when the new 21% corporate rate is in effect, would mean a $42 million deduction.

Similar calculations may be under way for other businesses that have also promised tax-bill bonuses or are considering charitable contributions or other year-end expenses ahead of the tax-law changes.

There is a catch: Mr. Trump might not sign the bill until the new year. That could push AT&T’s bonuses into 2018, raising the cost to the telecom giant. The final result depends on how it has structured its promise to make the payments.

AT&T, like other large companies, is an “accrual” taxpayer, booking income and expenses for tax purposes when it is certain of them, in some cases before the cash changes hand. That differs from “cash” taxpayers, like individuals, who are taxed on income when they actually receive it.

Under tax rules, compensation expense is accrued when it passes the “all-events” test—in other words, when all the conditions for the payments have been met, and the amount is set.

AT&T has publicly tied the bonuses to Mr. Trump signing the bill, saying it plans to pay them “once tax reform is signed into law.” In that case, the all-events test wouldn’t be met until that time, tax experts say. If that doesn’t happen until 2018, AT&T stands to lose 40% of the tax deduction it could have claimed.

But if AT&T has committed to paying the bonuses, and the question is only when it cuts the checks, the company can accrue the payment this year—and saves $28 million on the gesture. (It also must actually make the payments by mid-March, under IRS rules.)

AT&T has said it will pay the bonuses over the holidays if Mr. Trump signs before Christmas, but a spokeswoman declined to say whether the bonuses themselves are contingent on the president’s signature.

“Most corporate taxpayers would be better off with a 2017 tax deduction than a 2018 tax deduction,” said James Salles, a tax attorney at law firm Caplin & Drysdale in Washington. “They would not want to needlessly complicate their entitlement to a deduction by saying something that would make it seem contingent on something that might not happen by the end of the year.”

Tax attorneys say that similar determinations are likely being discussed around the U.S., as companies figure out whether to make charitable contributions or ordinary business purchases like equipment and supplies in 2017 or 2018. If the amount is fixed and the commitment is made by Dec. 31, accrual companies are on firmer ground claiming the bigger deduction.

“I can guarantee you these guys are doing everything they possibly can to accelerate deductions before the end of the year,” said Andrew Schmidt, a North Carolina State University accounting professor specializing in corporate taxes.

When it comes to bonuses for top executives, the stakes are even higher: Accruing the bonus in the new year, as companies often do thanks to provisions giving boards discretion to adjust payouts, could mean forgoing a deduction altogether. That is because the new tax legislation will make it more difficult for companies to deduct pay over $1 million for top officers.

“We have companies who are rushing to get those bonuses accrued this month, because it’s 35% of whatever vs. 0% if it’s over $1 million next year,” said Caplin & Drysdale’s Richard Skillman, who served as deputy chief counsel and acting chief counsel of the Internal Revenue Service under President George W. Bush.

For AT&T and the bonuses it plans for rank-and-file workers, the sums at stake aren’t huge. It reported $3.03 billion in profit for the three months ending Sept. 30, and even the full $200 million pre-tax cost of the bonus payment pales beside the nearly $12 billion in dividends it paid in 2016. It is about equivalent to the $193 million AT&T said it paid its top five executives over the past three years.

Then again, $28 million is still $28 million.