By Stephen D. Kirkland, CPA, CMC, CFF Originally published in The Tax Adviser, September 2022. Copyright: AICPA. EXPENSES & DEDUCTIONS It is common for business owners to personally guarantee company debts. This is a valuable service since many private companies could not otherwise obtain financing in the current lending market. Indeed, business owners already face…
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Contingent Compensation
Contingent compensation may be a discretionary bonus or an amount to be determined by a written formula. Either way, it should meet the same standards of reasonableness and compensatory intent as traditional salary compensation. To determine whether the amount is reasonable, carefully consider the facts and circumstances which existed at the time the bonus was…
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Which Types of Compensation are Considered?
The reference in Internal Revenue Code § 162(a)(1) to “other compensation” includes all current and deferred compensation. Deferred compensation includes employer contributions to qualified retirement plans and non-qualified deferred compensation arrangements. The current value of any equity-based compensation, such as stock options, is also considered. The costs of welfare benefits and fringe benefits are also…
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The Multi-Factor Approach
Beginning with Mayson Manufacturing Co. v. Commissioner, 178 F.2d 115 (6th Cir. 1949), the courts have developed various factors to consider in determining whether compensation amounts were reasonable. Some of the key factors are: · The employee’s qualifications, including education and training, · The nature, extent and scope of the employee’s duties, · The amount…
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