Corporate Nonliquidating Distributions (Karl Stick and Stock Company)

Karl Stick is president of Stock Company. He also owns 100 percent of its stock. Karl's salary is $120,000. At the end of the year, Karl was paid a bonus of $100,000 because the firm had a good year. Stock Company deducted $220,000 as compensation expense for the year. Upon audit, $80,000 of the deduction was disallowed. How could this happen? How would you advise Stock Company?

© SolutionLibrary Inc. 9836dcf9d7

Solution Preview W-2 received by any employee of any entity. It is reportable on the personal return.

The dividends are not deductible to the corporation, but are taxable to the individual. There are no payroll taxes associated with dividends, and the dividend tax rate at the individual level may be a preferred rate. For the corporation, the dividends are effectively double-taxed. Because they are not a deduction at the corporate level, there is no tax savings for paying dividends. Then the individual reports and pays tax on the amount received.

What closely-held corporations try to accomplish:

They want as much as they can support to be called wages as opposed to dividends. ...