One law firm learned the hard way that they can’t eliminate corporate income taxes by characterizing all payouts to attorney-shareholders as salary and bonuses when, in fact, part of the payouts are nondeductible dividends. Making this characterization resulted in a 20% accuracy-related penalty because there was no reasonable cause for taking this position. Only reasonable compensation for services performed can be deducted.
Barbara Weltman
Big Ideas for Small Business, Inc.
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