Tax clinic:
Is my corporate salary excessive?
QUESTION : When will my cor-
porate salary be considered exces-
sive?
ANSWER : Salaries paid to cor-
porate employees are deductible to
the corporation and are income to
the employee providing that the
salaries are reasonable . Salaries paid
to corporate employees who are also
shareholders are subject to scrutiny
by the Internal Revenue Service for
purposes of ascertaining that the
payment of the salary was in
exchange for services rendered as
opposed to a distribution of profits
disguised as compensation and
which the IRS will deem to be a
dividend distribution .
To determine if compensation is
reasonable , the particular facts and
circumstances of each case must be
analyzed . Various factors are review -
ed, including among them the
employee 's duties , the nature of the
business, the volume of business,
character or responsibility , time
req uired . general cost of living in the
area of employment and the ability ,
educational level. knowledge and
achievement of the particular em -
ployee . Comparison of salaries paid
to employees in other corporations
similar to the corporation under audit
is often used as a basis of determining
reasonableness of the compensation .
Another important factor that is
taken into consideration is the
determination of whether the com -
pensation actually paid was agreed to
prior to the performance of services.
In this regard , corporate minutes
authorizing the salaries of key
employees, particularly officers who
are also shareholders at the begin -
ning of the year , is an important
factor to help sustain the deductibility
of th e compensation . Conversely ,
large bonuses at the end of the year
in comparison to the salary paid
during the year may create the
appearance that the payment was a
distribution of corporate profits in
lieu of the payment of salary for
services rendered .
Compensation which is determin -
ed to be excessive to shareholders-
employees will not be allowed as a
deduction to the corporation , but will
be income to the employees. Analy -
sis of this particular problem should
be made throughout the year and
documentation maintained to justify
the reasonableness of the salary so as
to avoid the above result.
- By Comprehensiue Accounting
Corp . of Aurora , JIIinois. Compre -
hensiue prouides a bookkeeping,
accounting, and tax seruice to ouer
14,000 business clients each month·
through a nationwide network of
more than 140 franchised offices.
For additional information on their
seruices, circle number 91 on the
"Reader Seruice Card" inserted in
this magazine.
Visit the 35th Annual
AMUSEMENT TRADES EXHIBITION
Alexandra Palace, London, England
23rd-25th January, 1979
145 EXHIBITORS
45,000 sq. feet of display area
EUROPE'S LARGEST AND MOST
IMPORTANT EXHIBITION OF COIN
MACHINES AND RELA TED EQUIPMENT
PLAY METER . January. 1979
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