They do this by recharacterizing some of it as constructive dividends . And if this is done, you can bet there'll be a penalty assessed. And penalties are, you guessed it, non-deductible to your C corporation as well. Well, in the early years of your company it is generally recommended that you use a proprietorship or other flow-through entity, as these allow you to offset your personal income with the business losses typical of new companies. But as you start to become profitable, a C corporation has some handy attributes.
Unreasonable compensation is, in a way, a really nice problem to have.
If you're paying yourself so much in salary and bonus that the IRS is hassling you, that means your business must be hugely successful. All Rights Reserved.