E-Alert
June 22, 2010
S Corp Shareholder Must Take Reasonable Wages
A recent court case again demonstrated that shareholders of an S Corporation must take reasonable compensation.
In the case cited, a CPA took only $24,000 of wages from his S Corporation, but received $220,000 as a dividend. The IRS challenged the $24,000 as unreasonably low compensation and re-characterized $175,000 of the dividend as wages. The Court upheld the IRS's position.
Reasonable compensation in a closely-held business is a matter of judgment. But the IRS has won multiple cases in this area and we expect to see more audits and court cases on this issue.
If you have any questions regarding the information in this article, or have any other issues you would like to discuss, please feel free to contact the DZH Phillips tax department at 415.781.2500 or email cpas@dzhphillips.com.
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