Owner compensation: Deciding what’s reasonable

Description

Abstract: If the IRS deems a shareholder’s compensation unreasonably high for the services rendered, the excessive compensation could be treated as a constructive dividend. So the compensation would be disallowed as a salary deduction. However, as a recent Tax Court decision shows, the “reasonable compensation” evaluation isn’t always as straightforward as it might seem. This article discusses the case, noting the factors that determine reasonable compensation. A sidebar discusses other issues the case addressed.