In Midwest Eye Center, S.C., the Tax Court said so!
An eye care center, a corporation with five surgeons, paid a $2 million bonus to its sole shareholder and medical director, a surgeon who had to increase his workload significantly when one of the other surgeons quit unexpectedly and another began working fewer hours. Although the corporation deducted the entire amount as a business expense, the IRS disallowed $1 million and assessed an accuracy-related penalty of $62,000, contending that half of the bonus was a disguised dividend rather than bonus compensation. The Tax Court agreed, upholding the tax deficiency and penalty because the corporation failed to provide any evidence of comparable salaries or the methodology to show how the bonus was determined in relation to the shareholder’s responsibilities to support its position that the amount was reasonable.
Taxpayers should be careful in planning C- Corporation salary to owners.