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REASONABLE COMPENSATION EXPERT WITNESS

     

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Reasonable Compensation, as defined by the Internal Revenue Services in section 162(a)(1): (1) the amount of compensation must be reasonable and (2) payments must be in fact for services rendered.

REASONABLE COMPENSATION CPA

Closely held businesses are generally managed by their owners.  Consequently, many have the freedom to set their own compensation packages, which, based on the services they provide the business, may or may not be reasonable. Do the owners set compensation packages based on what is necessary to live well, based on what the accountant considers appropriate, or based on what they need for personal survival?  If a company is doing well, owners may pay themselves excessive salaries in order to minimize tax liabilities.  Alternatively, when companies are in a start up phase or are marginally profitable, owners may pay themselves very low salaries in order to improve the bottom line. 

The Internal Revenue Service states, in regards to the definition of reasonable compensation: “shareholder-employees should receive reasonable compensation for the services they perform.”  However, “whether their salaries constitute reasonable compensation is based upon all the relevant facts and circumstances.”

In any given case, there are numerous factors that should be considered in determining the reasonableness of compensation. The IRS lists some factors by the courts when determining reasonable compensation (FS-2008-25):

  • Training and experience.
  • Duties and responsibilities.
  • Time and effort devoted to the business.
  • Dividend history.
  • Payments to non-shareholder employees.
  • Timing and manner of paying bonuses to key people.
  • What comparable businesses pay for similar services.
  • Compensation agreements.
  • The use of a formula to determine compensation.

Zamucen & Curren has provided “Reasonable Compensation” services for the past 30 years. Our credentialed and experienced staff is ready to assist you and work through the complex issues of your case.

Please feel free to call for attorney references.

   
     
 

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