If you are a shareholder of a Sub Chapter S-Corporation, it is important for you to be aware of a recent court case regarding the payment of reasonable compensation for active shareholders in the conduct of their business. Please read the attached article and consider how it impacts the compensation policy within your company.
Based upon past experience and other research articles I have read, most accountants adhere to the theory that shareholders of S-Corporations should be taking at least 50% of their “net profit” in wages versus dividends. Another issue to consider when determining the amount of dividends to withdraw from your corporation involves tax basis of your stock. If you take out too many dividends it may result in a negative tax basis in your stock which can result in capital gains treatment of the excess. By balancing the compensation and dividend issue appropriately you keep the IRS off your back and you solve the basis issue.
If you would like more information on this topic please download the file below which provides more details on this topic.
Dean R. Holland, CPA