Excessive compensation is the portion of cash and benefits that, in total, exceeds the value of services provided in exchange for that compensation. To make this determination, the value of all services provided are considered. For executives, such services commonly involve roles in management, marketing, operations, finance, and human resources. They may also include special…
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How does the IRS define Reasonable Compensation?
Internal Revenue Code section 162(a)(1) allows income tax deductions for various business expenses, including “a reasonable allowance for salaries or other compensation for personal services actually rendered.” Reg. section 1.162-7 (b)(3) says, “It is, in general, just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like…
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How is Reasonable Compensation Determined?
There are multiple methods of determining reasonable compensation amounts. The oldest approach is known as the multi-factor method, and it considers all the facts and circumstances. One of the key facts is referred to as compensation comparability data. This data should be actual amounts that similar employers paid for similar services. The independent investor test…
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Helping S Corporations avoid Unreasonable Compensation Audits
© 2015 American Institute of CPAs - All Rights Reserved. Reprinted with permission from the June 2015 issue of Journal of Accountancy. Find out what entries on Form 1120S may trigger these audits. By Stephen D. Kirkland, CPA, CMC, CFF Since compensation is subject to employment taxes (including Federal Insurance Contributions Act taxes) and distributions…
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