Does an accrued director bonus reduce my UK company's tested income on Form 5471?

Not in the year of accrual if it is still unpaid at the year end. Where the US director owns more than 50% of the company by value, section 267(a)(2) defers the CFC's deduction until the bonus is includible in the director's income, which for a cash-basis individual is usually the payment year. The deduction then reduces tested income and earnings and profits in that later year.

How long does a UK company have to pay a bonus to get the corporation tax deduction?

Section 1288 of the Corporation Tax Act 2009 allows the deduction in the period of account in which the bonus is accrued only if it is paid within 9 months after that period ends. If it is paid later, the deduction moves to the period of payment. If it is never paid, no corporation tax deduction is allowed at all.

When is a UK director taxed under PAYE on a bonus?

At the earliest of payment, entitlement, or, for directors only, the time the bonus is credited in the company's accounts or records, the end of the period if the amount was fixed by then, or the date the amount is determined if that is after the period end. That means an owner-director can face PAYE before any cash is paid out.

Which Form 5471 category do I check as the sole US owner of a UK company?

A US person who controls a UK company and is also a US shareholder of the CFC meets both Category 4 and Category 5a. The IRS instructions say to check only the Category 4 box and leave Category 5a blank, but you must still complete every schedule that either category requires, including Schedules H, I-1, J and M.

Can the foreign earned income exclusion cover a bonus paid in the following year?

Sometimes, but only to the extent of exclusion left unused in the year the services were performed, because the exclusion follows the year of the work rather than the year of payment. Owner-directors whose salary already uses the full exclusion usually find that a deferred bonus is covered instead by the foreign tax credit for UK income tax withheld under PAYE.

What happens to the US and UK deductions if the director waives the bonus?

In the UK, unpaid remuneration is never deductible, so the accrual is added back for corporation tax. For Form 5471, an amount never includible in the director's income never becomes deductible to the CFC, so the deferral becomes permanent. If the director was already treated as receiving the bonus before waiving it, PAYE and US income can still arise.

Form 5471 and Unpaid Director Bonuses in a UK Company

Form 5471 treats an unpaid director bonus very differently from your UK accounts. When a US citizen owns and runs a UK company that is a controlled foreign corporation (CFC), a bonus the company accrues at its year end generally cannot be deducted in computing the CFC's US-measured income until the year the director has to include it in his or her own US income, which for a cash-basis individual is normally the year it is paid. The UK, by contrast, gives the corporation tax deduction in the year of accrual, provided the bonus is actually paid within nine months of the period end.

The result is a timing gap of up to a full year that runs through Schedule C, Schedule H, Schedule I-1 and Schedule M of Form 5471 and then into the director's own Form 1040. In the returns we prepare for London-based owner-directors, this is one of the most common reasons why the US numbers do not tie to the UK corporation tax computation, and one of the easiest to get wrong when the US return is prepared from the UK statutory accounts alone. Below we cover both sets of rules, a worked illustration, and two cases most guides skip: waived bonuses and bonuses paid after the director returns to the US.

What does Form 5471 require from a US owner-director of a UK company?

Form 5471 is the IRS information return that US persons file for certain foreign corporations. A US citizen who owns more than 50% of a UK private limited company by vote or value is a Category 4 filer, because the instructions define control as owning more than 50% of the total combined voting power or the total value of the stock. The same person is also a US shareholder of a CFC, which is the Category 5 test. The IRS instructions at https://www.irs.gov/instructions/i5471 say that a filer who meets both Category 4 and Category 5a should check only the box for Category 4 and leave the Category 5a box blank, while still completing every schedule that either category requires.

For a sole owner, that is a heavy package. The instructions give the example of a sole owner of a CFC who must complete all pages of the form and the separate schedules, including Schedule H (current earnings and profits), Schedule I-1 (information for the section 951A inclusion), Schedule J (accumulated earnings and profits), Schedule M (transactions between the CFC and shareholders or other related persons) and others. The form is attached to the owner's income tax return and is due with it, including extensions. The penalty for failing to furnish the information on time is $10,000 for each annual accounting period of each foreign corporation with further $10,000 penalties if the failure continues more than 90 days after an IRS notice, up to $50,000 per failure, and a possible reduction in foreign tax credits.

How does the UK tax an accrued director bonus at the company level?

UK company accounts are prepared on an accruals basis, so a bonus that the company is committed to paying for a year is charged as an expense of that year even if the cash goes out later. For corporation tax, section 1288 of the Corporation Tax Act 2009, published at https://www.legislation.gov.uk/ukpga/2009/4/section/1288, overrides that accrual where the remuneration is not paid within the period of 9 months immediately following the end of the period of account. If it is paid after that 9-month window, the deduction is allowed for the period of account in which it is paid. If it is never paid, no deduction is allowed at all.

HMRC's Business Income Manual at https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim47140 explains the practical consequence. If the company's taxable profits are computed before the 9-month window has closed and some remuneration in the accounts is still unpaid, the computation must assume it will not be paid in time, and the unpaid amount is added back. If payment then happens inside the window, the company can amend its return within the normal time limits.

For a calendar-year company that pays the bonus in the spring, the UK deduction lands in the year of accrual. The US answer is usually the following year.

When do PAYE and National Insurance arise on a director's bonus?

For the director personally, the UK question is when the bonus is treated as received, because that fixes the PAYE point and the tax year in which it is taxed. Section 18 of the Income Tax (Earnings and Pensions) Act 2003, at https://www.legislation.gov.uk/ukpga/2003/1/section/18, treats money earnings as received at the earliest of several times. Two rules apply to every employee: the time payment is made, and the time the employee becomes entitled to payment. A third rule applies only to directors of the paying company, and it brings the receipt date forward to the earliest of:

the time sums on account of the earnings are credited in the company's accounts or records, even if there is a restriction on drawing them, which in practice catches a credit to the director's loan or current account;
where the amount for a period is determined by the end of that period, the time the period ends;
where the amount for a period is not determined until after the period ends, the time it is determined, such as the date the board resolves the bonus figure.

So for an owner-director the PAYE point can arrive before any cash moves. A bonus voted by the board in March and paid in April can be received for UK purposes in March. Employer and employee National Insurance follow the payment of earnings and are handled through the same payroll run, and the company can accrue the employer contribution alongside the bonus.

Why is the CFC's US deduction for the bonus deferred until payment?

For Form 5471, the CFC's earnings and profits and its tested income are not taken straight from the UK computation. They are recomputed under US tax principles, and one of those principles is the related-party matching rule in section 267(a)(2) of the Internal Revenue Code. The statute, at https://www.law.cornell.edu/uscode/text/26/267, says that where, because of the payee's method of accounting, an amount is not includible in the payee's income until paid, and the payor and payee are related under section 267(b) at the close of the payor's taxable year, the payor's deduction is allowed only as of the day the amount is includible in the payee's gross income.

Section 267(b)(2) treats an individual and a corporation as related where the individual owns, directly or indirectly, more than 50% in value of the corporation's outstanding stock, and section 267(c) attributes stock held by a spouse, siblings, ancestors and lineal descendants. A US director who owns the UK company outright, or who owns it together with a spouse, is almost always related to it. US individuals report wages on the cash method, so the bonus is not includible until it is actually or constructively received. Put together, the CFC's deduction for an accrued but unpaid bonus slides into the US year in which the director includes it, which is usually the year of payment.

The deferral is clearest for tested income on Schedule I-1, because that figure is built from gross income and allowable deductions under US income tax rules. For earnings and profits on Schedule H, the instructions direct adjustments from book income under Regulations section 1.964-1(b) and (c), which apply US tax accounting standards. In the files we prepare we follow the same timing for E&P and tested income unless there is a documented reason not to, because a bonus deducted on one schedule and deferred on the other creates differences that are hard to defend and harder to unwind in later years.

Which Form 5471 schedules does an unpaid bonus touch?

An accrued bonus is a single line in the UK accounts, but it shows up in at least four places in the Form 5471 package:

Schedule C (income statement): the instructions require the income statement in the CFC's functional currency in accordance with US GAAP. Under accrual accounting the bonus is an expense of the year it relates to, so it normally appears in the year of accrual, matching the UK accounts.
Schedule H (current earnings and profits): line 1 starts from book income, and lines 2a to 2i carry the adjustments needed to move to US tax accounting. Where the bonus is unpaid at the US year end, it is added back as a timing adjustment in the accrual year and deducted in the year of payment.
Schedule I-1 (section 951A information): the allowable deductions used to compute tested income exclude the deferred bonus in the accrual year and include it in the payment year, which shifts tested income, and potentially the owner's inclusion on Form 8992, between years.
Schedule M (related-party transactions): compensation flowing between the CFC and its US shareholder is a related-party transaction, reported in US dollars translated at the average exchange rate for the year, with the rate shown at the top of the schedule. We report on the basis used in the books and attach a short statement identifying the accrued, unpaid bonus so the Schedule M figure reconciles to Schedule C and the director's Form 1040.
Schedule J and the following year's forms: because the deferral reverses, accumulated E&P catches up in the payment year, and the next return must pick up the deduction the current return deferred. This reversal is easily lost when preparers change.

How does the director report the bonus on Form 1040?

On the personal return the bonus is wages for services performed in the UK, and the US includes it when it is actually or constructively received. Constructive receipt can bring the US date forward where an amount is credited to the director's account and made available to draw without substantial restriction, so a credit to a director's loan account that the director is free to withdraw deserves the same scrutiny on the US side as it receives under the UK director rules. Where the board only votes the bonus after the year end and pays it in cash some weeks later, the US inclusion year is normally the payment year.

Two relief routes then interact with that timing:

Foreign earned income exclusion: the exclusion is tied to the year in which the services were performed, not the year of payment. A bonus earned in one year and paid in the next can generally use only the exclusion left unused in the year it was earned, and pay received later than the year after the services may not qualify at all. For an owner-director whose salary already uses the exclusion, a deferred bonus often gets no exclusion and relies on credits instead.
Foreign tax credit: the UK income tax and employee National Insurance withheld through PAYE on the bonus are the taxes that offset the US tax on it. Individuals on the cash method claim foreign taxes in the year paid unless they elect to claim on an accrual basis, so the US year of the credit and the US year of the income should be checked against each other. Mismatched years can strand credits that then have to be carried.

The section 951A side adds another layer for the owner. Because the deferred bonus raises the CFC's tested income in the accrual year and lowers it in the payment year, the owner can face a larger inclusion on Form 8992 in one year and a smaller one in the next. Many UK trading companies qualify for the high-tax exclusion election, but the effective foreign tax rate is measured on the US-computed base. If US tested income is inflated by a deferred bonus while UK corporation tax was computed on profits after that bonus, the effective rate for the accrual year falls and can dip below the threshold the election requires, even though the business is fully taxed in the UK across the two years.

Worked scenario: a bonus accrued at 31 December and paid in April

All figures below are an illustration only. The exchange rate of 1 GBP to 1.30 USD for both years and the 25% corporation tax rate are assumptions chosen to keep the arithmetic simple, not rates to rely on for a filing. Employer National Insurance is ignored.

Daniel is a US citizen living in London. He owns 100% of a UK consultancy company with a 31 December year end, so the company's UK period and its US tax year line up. For the year to 31 December 2025, the company's profit before his bonus is 900,000 GBP. In December 2025 the board agrees in principle that a bonus will be paid for 2025, and on 20 March 2026 it fixes the amount at 300,000 GBP. The accounts for 2025 accrue the full 300,000 GBP, and the bonus is paid through payroll on 30 April 2026, well inside the 9-month window.

UK corporation tax for 2025: the bonus is paid within 9 months, so it is deductible in 2025. Taxable profit is 600,000 GBP and, at the assumed rate, corporation tax is 150,000 GBP.
UK PAYE for Daniel: under the director rule, the bonus is treated as received no later than 20 March 2026, when the amount was determined. It falls in the UK tax year 2025 to 2026 and PAYE is operated on it.
Form 5471 for 2025, Schedule C: the 300,000 GBP expense appears in the 2025 GAAP income statement, consistent with the UK accounts.
Form 5471 for 2025, Schedules H and I-1: at 31 December 2025 the bonus was unpaid and not yet includible in Daniel's income, so the 300,000 GBP is added back. US-measured income before tax is 900,000 GBP, about 1,170,000 USD at the assumed rate.
Effective rate check for 2025: UK tax of 150,000 GBP on a US-measured base of 900,000 GBP is roughly 16.7%, against 25% on the UK base. The gap alone can determine whether the high-tax exclusion is available for that year.
Form 5471 for 2026: the bonus is deducted when Daniel includes it, so 300,000 GBP, about 390,000 USD, reduces 2026 tested income and E&P, and the timing difference reverses.
Daniel's Form 1040 for 2026: the bonus is reported as foreign wages when paid in April 2026, with UK PAYE on it supporting a foreign tax credit. Because his 2025 salary already used his exclusion for 2025, the bonus relies on the credit.

Across the two years the total deduction is identical in both systems. What differs is which year carries it, and on a US return that difference changes the section 951A inclusion, the high-tax exclusion test, accumulated E&P and the matching of foreign tax credits. Had the bonus been credited to Daniel's loan account in December 2025 with freedom to draw it, both the UK receipt date and the US analysis would need revisiting, because the US inclusion, and with it the CFC deduction, might then fall in 2025.

What happens on Form 5471 if the bonus is waived or never paid?

Owner-directors sometimes accrue a bonus and later decide to leave the money in the company. The UK consequence is set by section 1288(3): if the remuneration is not paid, no deduction is allowed. The accrual is added back for corporation tax, and if the accounts are later adjusted the release of the accrual needs to be followed through the computation.

For the director, the key question is whether the bonus was already treated as received before it was given up. A waiver made before the amount has been determined, credited to the director or become an entitlement generally prevents any receipt. A waiver made after one of the section 18 triggers has occurred may come too late to undo the PAYE position, and the forgone amount can look more like a contribution back to the company than a bonus that never existed.

On the US side, a bonus that is never paid and never constructively received is never includible in the director's income, so the section 267(a)(2) deduction for the CFC never arrives. The add-back made on Schedule H and Schedule I-1 in the accrual year simply becomes permanent. Where the director was in constructive receipt before waiving, the director has US wage income, the CFC has its deduction, and the waiver itself needs separate analysis as a possible contribution to capital that increases the director's basis in the shares.

What if the bonus is paid after the director moves back to the US?

A frequent pattern is a director who leaves London after the year end and is paid the final bonus from the US. Several things follow:

The source of the income does not move with the director. A bonus for services performed in the UK is foreign-source compensation even when it is paid to a US address, which keeps it in the foreign tax credit calculation.
UK tax still applies. Earnings for a period of UK employment remain within UK income tax, and the company operates PAYE on the payment through payroll, so there is UK tax available to credit.
The exclusion position depends on the year the services were performed and on whether that year qualified for the exclusion at all. A director who moved mid-year may have only a partial exclusion for the year of service, and a bonus received more than a year after that may not be excludable.
The company stays a CFC. Moving home does not change Daniel's ownership, so he continues to file Form 5471, and the payment year still carries the deferred deduction on Schedules H and I-1.
Keep dates consistent: the residence or presence dates claimed for the year of service should match the bonus analysis.

The failure mode we see most often here is a first US-based return that reports the bonus correctly as wages but omits the related deduction on the CFC's Form 5471 for the same year, so the deferral from the previous year never reverses.

How do we prepare Form 5471 when a director bonus is outstanding at year end?

Our preparation file for an owner-director's company follows the same sequence each year:

Obtain the board minutes or written resolution that set the bonus, and note the date the amount was determined.
Obtain the payroll record showing the payment date and the PAYE and National Insurance deducted.
Review the director's loan or current account for credits of bonus before payment, which affect both the UK receipt date and US constructive receipt.
Confirm ownership percentages, including family attribution, to establish that the company and the director are related under section 267(b).
Compare the UK corporation tax computation with the US tax-basis figures and record the bonus as a timing adjustment on Schedule H and Schedule I-1 where it was unpaid at the US year end.
Carry the reversal into the next year's Form 5471 and confirm that the director's Form 1040 picks up the wages, foreign tax credit and any exclusion in the matching year.

Key takeaways for US owner-directors of UK companies

An unpaid year-end bonus is deductible in the UK for the year it relates to if it is paid within 9 months, and taxed on the director under the UK receipt rules, which for directors can fall before payment. For Form 5471, the CFC's deduction normally waits until the director includes the bonus in US income, because the related-party matching rule in section 267(a)(2) applies when the CFC's income is measured under US principles. The two systems agree on the amount and disagree on the year. Handled carelessly, the gap distorts the section 951A inclusion, the high-tax exclusion test and the foreign tax credit.