5.10 Tax Considerations in Determining Compensation

• Library: Corporations and Partnerships in Virginia (Virginia CLE) (2016 Ed.)

5.10 TAX CONSIDERATIONS IN DETERMINING COMPENSATION

5.1001 In General. All of the foregoing methods of compensation, including benefits provided through pension or profit sharing plans, are subject to the test that the aggregate amount of compensation provided to the employee must constitute reasonable compensation. ⁴⁸⁷ Thus, contributions to

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qualified or nonqualified plans, health and accident benefits, contributions to the group term or permanent insurance plans together with all other direct or indirect compensation are subject to the test of reasonable compensation in order to be deductible by the employer. The employer may deduct only a "reasonable allowance for salaries or other compensation for personal services actually rendered." ⁴⁸⁸ Where compensation is found to be in excess of a reasonable amount for salaries or other compensation for personal services, then the excess is not deductible as compensation but will, nevertheless, remain taxable as income to the employee. The excess salary may be treated as a dividend, for example, where the employee is also a shareholder of the corporation-employer. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. In such a case, if the salaries are in excess of those ordinarily paid for similar services and the excessive...