Under tax law, compensation can be deducted by a business only to the extent that it’s reasonable. Any unreasonable portion, if paid to a shareholder, isn’t deductible and may be taxed as a dividend. In one case, a U.S. Appeals Court found that a closely held construction company didn’t establish that the compensation paid to its CEO was reasonable. Therefore, it disallowed part of the corporation’s business deduction for bonuses paid to the CEO in two years. The court agreed with the U.S. Tax Court “that the bonuses were excessive, with the excess amount actually representing a disguised payment of dividends from profits, which could not be deducted.” (Clary Hood, Inc. CA 4, 5/31/23)
Our Blog 