Academic journal article Journal of Accountancy

Deducting Compensation Paid in Property

Academic journal article Journal of Accountancy

Deducting Compensation Paid in Property

Article excerpt

Compensation can be paid in cash or in property. An employee includes the value of the property in his or her income at the time of receipt (or, if the property is restricted, when it vests). Recently, an employer questioned at what point it was entitled to a deduction for compensation paid.

Venture Funding issued stock to 12 of its employees as compensation for services as part of a bankruptcy reorganization. Although Venture neither withheld taxes nor issued forms W-2 or 1099 on the compensation paid--as the rules require--it deducted the value of the stock as compensation. The IRS denied the deduction because the company failed to meet the requirement that a business either withhold tax or issue an information return before claiming a deduction. The taxpayer appealed.

IRC section 83(h) permits a deduction for compensation paid in property in the year the recipient includes the property in income. Before 1995, employers could claim a deduction if they withheld income taxes. The current rules require the employer to issue an information return. For property that is vested at the time of transfer, a special exception allows the employer to take a deduction under its normal accounting method.

Result: For the IRS. …

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