Many corporations have an incentive to compensate their employees and other contractors who perform services as salary. This total salary then can be used as a salary deduction for tax purposes, leading to a smaller cash outflow for taxes.
Some corporations, however, may attempt to account expenses or dividends as salary when it should not be considered salary. For instance, if a corporation pays a salary instead of a dividend to a large shareholder who did not perform any service, this would not be considered reasonable compensation. Moreover, the IRS would likely deem this payment to be a constructive dividend for tax purposes.
If you have questions about what constitutes reasonable compensation, contact the Iowa business attorneys of LaMarca Law Group, P.C., at (515) 705-0233.