Employee Bonus?

Question

Elmo is a majority stockholder in a coportation. He paid a bonus to his son, jake, that amounted to 10% of the corporation's profits for two successive years. The corportation took a salary deduction for the bonus, which amounted to $30,000.0 for each year (2 yrs) Jake is emplyed in the Marketing Department of the company and was the only employee in his position in the department to receive a bonus. The bonus was paid in addition to a salary of $55,000. The IRS disallowed the bonus deduction. Why is that?

Answer 1

The man (IRS) prefers that be called a dividend so they get double taxation...Since his son is the only one that got the bonus it is VERY suspicious.

Answer 2

IRS must tell Elmo the reason they disallowed the bonus deduction. its the taxpayer's right to receive a clear explanation.

But i am guessing there are two possiblities based on what you described.

1. Jake did not report the $30k income in the same tax year. For a corporation to entitled a deduction, the shareholder receipian (Jake is treated as shareholder in this case becuase of family attribution rule) must report the income in the same tax year. its call the matching rule.

2. Corporation reported the $30k as commision expense insead of salary. and IRS wants to relcass the expense by disallowing the commission expense (which is not subject to payroll taxes) to salary expenses (subject to payroll taxes).