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IS THERE A CAP ON DEDUCTIBLE PAY?

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in Small Business Tax,Small Business Tax Deduction Strategies

Q. I read your article on reasonable compensation with interest (12/26/05 issue). I thought there was a maximum amount that any employee, other than a CEO or company president, could be paid. Is that true? E.M., Seattle

A. Sort of. The IRS generally places no limit on the amount of compensation a company can pay one of its employees and deduct as a business expense. However, compensation amounts must be reasonable, which is a standard that depends on a number of factors. An unfavorable exception applies to deductions  for compensation paid by a publicly traded company to its chief executive officer or its four highest-paid officers (other than the CEO). In this case, deductible compensation amounts are generally limited to $1 million a year per executive. Certain exceptions exist for performance-based compensation that is approved by a majority shareholder vote and verified by the board of directors. Tip: No such limits apply to closely held companies.

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