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May 2010 » What Is Reasonable Compensation...
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John R. Ledgerwood, MS (Acc.), CPA, CMA, CFM
The issue of what reasonable compensation for shareholderemployees of S corporations should be has been around for some time. Every time the IRS accepts a Form 2553, “Election by a Small Business Corporation,” it sends a CP261, “Notice of Acceptance as an S Corporation.” This acceptance letter specifically emphasizes the requirement for shareholder-employees to be paid reasonable compensation for the services that they provide to the corporation. The IRS has increased its interest in this area over the past few years, and it is now more likely than ever that the adequacy of a shareholder-employee's salary could become the subject of an IRS audit.
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