The Tax Court recently found that there is a limit on the tax deductibility of wages paid to employees by the employer.
Generally, wages paid to employees are tax-deductible if the payments are “reasonable.” What constitutes “reasonable” compensation, though, depends on the circumstances.
When a construction firm recorded large profits in 2015 and 2016 due primarily to the owner’s personal efforts and contacts, the company paid him a bonus of $5 million each year in addition to his six-figure salary. The IRS thought the bonuses were excessive.
The Tax Court ultimately ruled that “reasonable” amounts for the bonuses were less than $5 million for 2015 and 2016. Read more.