Retroactive Bonus Payments for Fishermen
It is common for fish processors to pay a retroactive bonus to fishermen (based on the ultimate sales price of the fish) in order to entice the fishermen to sell to the processor in the upcoming fishing season. Many fish processors struggle with the accounting mechanics of when to properly deduct these bonuses.
If a fish processor is using an accrual method of accounting and a calendar year, the bonus expense is deductible in the year it is paid, and not in the previous year the fish were sold to the processor.
An accrual basis taxpayer, unlike a cash basis taxpayer, is not governed by the time of payment in deducting expenses. Generally, expenses are deductible by accrual method taxpayers if the “all-events test” is satisfied. The all-events test states that a liability is incurred and is deductible, for income tax purposes, in the taxable year in which:
- All of the events have occurred which fix the fact of the liability:
No accrual can be made where the liability has not actually been incurred, is contingent upon an uncertain future event, or is contested and not paid.
- The amount can be determined with reasonable accuracy
Although no liability can be taken into account before economic performance and all of the events that fix the liability have occurred, the fact that the exact amount of liability cannot be determined and the date of payment has not been fixed does not prevent a taxpayer from taking into account that portion of the amount of the liability which can be computed with reasonable accuracy within the taxable year.
- Economic performance has occurred.
The all-events test is not treated as met before the time that economic performance occurs regarding the item. If a taxpayer’s liability arises out of the provision of service or property to the taxpayer by another person, economic performance occurs as the services or property is provided.
The commercial fishing industry can be quite volatile. Depending on the profitability of a particular fishing season, the retroactive bonus may or may not be paid. Some seasons have seen a total absence of bonuses in some fisheries. The amounts paid per pound and per species vary from season to season and from fishery to fishery.
In the commercial fishing industry, “economic performance” between a seafood processor and commercial fisher occurs simultaneous with the purchase of the raw seafood from the fisher. The retroactive bonus is not necessarily fixed and determinable prior to the end of the calendar year. All events which fix the fact of liability have not occurred. With respect to retroactive bonuses, the fact of liability is not fixed until each seafood processor unilaterally decides to pay a bonus. The processor has no legal obligation to pay the bonus until the check is actually cut. Furthermore, the amount of the bonus may not be determinable with reasonable accuracy until certain events have occurred.
Generally fishers do not enter contracts with seafood processors guaranteeing the fishers will receive a bonus if the processor earns a certain level of profit during the year. Although wholesale buyers will occasionally guarantee a base price per pound and a profit percentage to certain processors in writing, written price guarantees to fishers by processors are largely unheard of. The only event which occurs with respect to a bonus which fixes the liability is payment.