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March 01, 2011 at 07:18 AM
This is the first in a series of 23 tax tips that AdvisorOne will publish on each business day in March as part of our Tax Planning Special Report (see our Special Report calendar for a more complete list of topics to be covered and experts who will deliver their insights).
Today’s tax tip comes from the experienced mind of Martin Shenkman of Shenkman Law, with offices in New Jersey and New York, one of whose specialties is tax planning. Shenkman is the author of 34 books, received a BA from the Wharton School, his MBA from the University of Michigan, and his JD from Fordham University. This and future tips from Shenkman are longer-term strategies that are focused on a longer time horizon, setting up structures that will protect clients not just this tax season and next, but all the way to the settlement of their estates.
The Tip: Pay Attention to Reasonable Compensation.
can err on either side of reasonable by taking too much or too little compensation in salary and perks from a closely held business. “Either extreme," warns Shenkman (left), “can have a ripple effect of negative tax consequences.” If a parent, he adds, takes too little for himself and his children are part owners in his company, that could result in the ultra-low salary being deemed a gift to the children. He also points out that some business owners believe they can avoid FICA by taking their (too low) compensation as a distribution or a dividend rather than as a salary: another red flag for the IRS.