C Corp Reasonable Wages

[Unregistered]

I have client who intends to someday pay a salary, but for now the C Corp is not profitable. Although the client does perform substantial services for the Corp, isn't it unreasonable to force the client to pay himself a salary even though it will further increase his losses?

Also, in order to keep his business afloat, he makes loans to the C Corp. The only way he could pay himself a salary is by loaning the funds to the corp and then paying himself. That seems unreasonable to me, but the law is the law.

He asks me, "What do other startup businesses do when you can't afford to pay yourself a salary because you have other expenses?"

My thoughts are: Don't form a corporation until you can afford to pay yourself wages, especially if you are performing services for the corporation.

Your thoughts. TIA

[jainen]

no problem

>>Don't form a corporation until you can afford to pay yourself wages<<

C-Corp is a good form in the early years before you start making money. Later you can switch to something else that avoids corporate income tax.

The issue of reasonable compensation is not what you may think. For S-corps, the IRS wants to see an appropriate salary so you don't skip out on SE tax. But for a C-corp it's the opposite. They don't want you paying TOO MUCH and taking a deduction for what should be after-tax dividends. You got no problem.

[Bees Knees]

I agree, no problem here. In the C corp world of court cases, there are zillions of cases where C corps paid little or no wages in early years, then bumped salaries into the millions when the business took off. IRS says you can’t do that. The courts say, of course you can do that. ALL businesses struggle in the beginning. The huge bump in salary is a reward to the shareholder responsible for making the business work.

You could also suggest that the C corporation make a written employment contract with the owner employee stating that compensation will be deferred until a profitable year, and then make up some kind of legally sounding formula to determine base salary plus bonuses that are being deferred until profitable years. That way you have it in writing ahead of time that the corporation intends to pay huge salaries for all those prior years it couldn’t afford to.

This kind of stuff is done all the time.

[OldJack]

I don't usually respond to posts by unregistered guests but really Bees... "make up some kind of legally sounding formula"???? Those kind of things usually just cause legal problems down the road.

With the IRS position that corporations can only deduct a max of an executive salary upto $1 million [IRC§162(m)(1)] I don't think the IRS would be very concerned if you deducted a little less.

[Bees Knees]

With the IRS position that corporations can only deduct a max of an executive salary upto $1 million [IRC§162(m)(1)] I don't think the IRS would be very concerned if you deducted a little less.

Section 162(m)(1) applies to publicly traded corporations, and the $1 million limit only applies to the chief executive officer, and the 4 highest compensated officers for the taxable year.

It does not apply to private companies.

[OldJack]

Section 162(m)(1) applies to publicly traded corporations, and the $1 million limit only applies to the chief executive officer, and the 4 highest compensated officers for the taxable year.

It does not apply to private companies.

True... I did not intend to imply that §162(m)(1) applied to the normal deduction of officer salaries in a private company. I was only pointing out that the IRS position on what it might consider as a high salary would logically be something in excess of $1 million. I have had doctors with as much as $500,000 salary in C-corps and the IRS has never shown an interest. I have had contrators with $zero salary in C-corps and the IRS has never shown an interest.