Category: Compensation & Benefits; Accounting
Periods & Methods Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Law firm plans to hire a top attorney and pay a signing bonus of somewhere between $50,000 and $250,000. The issue is whether this payment is immediately deductible or must be capitalized and amortized over the life of the employment contract. It seems clear that such a payment creates an intangible capital asset that should be amortized over its useful life. The practice of paying a signing bonus is of course common in sports. Revenue Ruling 67-379, 1967-2 CB 127, deals with the issue somewhat indirectly. Prior to this ruling, there were some very old cases that held that a signing bonus paid in conjunction with a standard, one-year baseball contract was wholly deductible in the year paid. There was never any question as to whether the signing bonus created a capital assets; rather, the only issue was the period over which it should be amortized. The old court cases ignored the renewability feature of the standard baseball contract of the day. The Revenue Ruling took the position that the renewability should be taken into account. If the attorney is paid simply for signing the employment contract and not for anything else, it seems hard to escape capitalization. I think in order to avoid this result, the taxpayer would need to do things that would change the economics of the deal. For example, increase the first year salary or something of that sort. |
