Employee Compensation Deduction
Tax Research Memorandum
Mr. Jones, President
From: Tax Accountant, CPA
Tax Treatment of Employee Compensation in Business Deductions
Facts
Mr. Jones is the President of a corporation owned by him and members of his family. Mr. Jones was paid $48,000 in salary and the corporation paid $12,000 in a pension plan contribution on Mr. Jones's behalf for the tax year. The IRS Agent claims that both the salary paid to Mr. Jones and the pension plan contribution must be taken into account to determine whether the total compensation is reasonable in amount. The corporation wants to know if the pension plan contribution must be taken into account in determining the total compensation reasonableness to Mr. Jones.
Issue
The issue is whether the pension plan contribution paid by the corporation must be included with Mr. Jones salary for the tax year to determine whether the total compensation was reasonable under the tax codes.
Rule
The total compensation includes salary and any other compensation for personal services actually rendered. This would include salary, benefits, such as vacation, sick leave, and retirement benefits, stock options, bonuses, and any other benefits the corporation provides for the employee, whether it is personal travel expenses, birthday awards, etc. Brewer Quality Holmes, Inc. v. Commissioner, No. 03-61040, (5th Cir. 2004) adjusted the deduction based on nine factors from Owensby & Kritikos, Inc. v. Comr., T.C. Memo. 2001-262. The nine factors included employee qualifications, nature, extent, and scope of employee's work, size and complexity of the business, comparison of salaries paid with gross and net income, economic conditions, comparison of salaries with distributions to stockholders, rates of compensation for comparable positions with comparable concerns, salary policy as to all employees,...
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