Academic journal article Journal of Accountancy

Reasonable Compensation

Academic journal article Journal of Accountancy

Reasonable Compensation

Article excerpt

Small businesses often are challenged by the Internal Revenue Service over the reasonableness of shareholder-employee compensation. This is due in part to the growth of entrepreneurial small companies during recent periods of economic growth and the advent of small- and midsized high-tech companies. Small businesses usually come under IPS scrutiny after realizing high earnings in a short period or when a long success streak leads to lofty compensation for its shareholders or owners. Here is a sampling of recent reasonable compensation cases and their results:

* Comtec Systems Inc. v. Commissioner. Comtec was entitled to deduct the full amount of compensation paid to its shareholders or officers including "catch-up" payments for undercompensated prior years.

* Boca Construction, Inc. v. Commissioner Boca was entitled to full deductions for amounts paid to its owners or officers because payments were reasonable for services provided.

* Donald Palmer Co., Inc. (TC Memo 1995-65). The company's compensation deduction was reduced because a bonus was too high in relation to regular salary drawn in previous years. The "bonus" was three and one-half times the regular salary. The IRS said an independent outside investor would not approve the amount because it would dilute the investor's return.

* Mad Auto Wrecking, Inc. v. Commissioner. The business was entitled to deduct full amounts paid to two controlling shareholders because, among other reasons, they were extremely qualified and productive in a highly specialized business and, despite the lack of normal corporate formalities such as minutes and contracts, an independent investor would have approved such payments. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.