Executive Compensation Presentation
Executive
Compensation
ACCT 530
General rules
Defined as: “the wage and benefit packages that comprise the pay received by top executives of business corporations.” Pertinent Codes and Regulations
§162(a)(1)
Allows a deduction for reasonably-based salaries and other performance-based compensations
§162(m)
Disallows deduction of greater than $1 million for publicly held corporations
Reg. §1.162-7(b)(3)
Reasonable compensation is “paid for like services by like enterprises under like circumstances” Recent Developments
Dodd-Frank Act
Say on Pay
Pay for Performance Disclosures
Common Tax Loopholes
Salary/Dividend Manipulation
Performance-based pay is not subject to
§162(m) $1 million limit
Corporations will pay a higher salary for performance rather than distributing dividends
Avoidance of payroll tax burden
S Corporations will lower their salary to lower taxes Accepting fringe benefits instead of salary
Court Cases
Reasonable Compensation
Menard, Inc. v. Commissioner
John Menard, founder and CEO of Menard, Inc.
Salary was $157,500 with bonus of $3,017,100
5% bonus program yielded him $17,467,800
IRS argues that salary is greater than
“reasonable compensation”
Court decision for taxpayer
Menard, Inc. v. Commissioner
Tax Court originally found salary to be excessive in comparison to other companies
Original decision reversed by Judge Richard
Posner, Court of Appeals
Menard was a “workaholic” and
“micromanager”
Comparison of other companies was inaccurate
Company grew substantially under guidance of
Menard
David E. Watson, P.C.
v. U.S.
S corp DEWPC employed CPA, David Watson
Distributed employee compensation of $24,000 in 2002 and 2003
Received dividends of $203,651 and $175,470 in 2002 and 2003, respectively
IRS argues that salary is less than “reasonable compensation” for Watson
Court decision against taxpayer
David E. Watson, P.C.
v. U.S.
Watson was
Compensation
ACCT 530
General rules
Defined as: “the wage and benefit packages that comprise the pay received by top executives of business corporations.” Pertinent Codes and Regulations
§162(a)(1)
Allows a deduction for reasonably-based salaries and other performance-based compensations
§162(m)
Disallows deduction of greater than $1 million for publicly held corporations
Reg. §1.162-7(b)(3)
Reasonable compensation is “paid for like services by like enterprises under like circumstances” Recent Developments
Dodd-Frank Act
Say on Pay
Pay for Performance Disclosures
Common Tax Loopholes
Salary/Dividend Manipulation
Performance-based pay is not subject to
§162(m) $1 million limit
Corporations will pay a higher salary for performance rather than distributing dividends
Avoidance of payroll tax burden
S Corporations will lower their salary to lower taxes Accepting fringe benefits instead of salary
Court Cases
Reasonable Compensation
Menard, Inc. v. Commissioner
John Menard, founder and CEO of Menard, Inc.
Salary was $157,500 with bonus of $3,017,100
5% bonus program yielded him $17,467,800
IRS argues that salary is greater than
“reasonable compensation”
Court decision for taxpayer
Menard, Inc. v. Commissioner
Tax Court originally found salary to be excessive in comparison to other companies
Original decision reversed by Judge Richard
Posner, Court of Appeals
Menard was a “workaholic” and
“micromanager”
Comparison of other companies was inaccurate
Company grew substantially under guidance of
Menard
David E. Watson, P.C.
v. U.S.
S corp DEWPC employed CPA, David Watson
Distributed employee compensation of $24,000 in 2002 and 2003
Received dividends of $203,651 and $175,470 in 2002 and 2003, respectively
IRS argues that salary is less than “reasonable compensation” for Watson
Court decision against taxpayer
David E. Watson, P.C.
v. U.S.
Watson was