Defining ‘Reasonable Compensation’ under the Tax Code

A Subjective Concept and Perennial Debate

Linda Campbell, PhD, CPA, CGMA, Pamela C. Smith, PhD, and Kasey Martin, PhD, CPA, CIA

In BriefCorporate tax deductions for executive compensation are a contentious topic, governed as they have been by the tax code's nebulous use of the term “reasonable” to limit the amount that may be deducted. The authors provide an overview of the law and how it has been interpreted by the Treasury Department and the courts over the years. The Tax Cuts and Jobs Act took steps that should reduce such tax maneuvering, but its limited scope leaves much more to be done before full clarity and parity in executive compensation would be possible.