Owners’ compensation: What’s reasonable for C corporations?
Abstract: The IRS and C corporations often disagree about the reasonableness of owners’ compensation. C corporations want payments to shareholder-employees to be classified as deductible compensation expense — but the IRS would prefer these payments to be classified as nondeductible dividends. This article explains the factors that persuaded the U.S. Tax Court to uphold $11 million in deductions for salaries, bonuses and directors’ fees paid to two shareholders in 2003 and 2004. H.W. Johnson, Inc. v. Commissioner, T.C. Memo. 2016-95 (May 11, 2016)