A Longstanding Focus of the IRS When Examining a Return

question 49

Essay

A longstanding focus of the IRS when examining a return of an S corporation is whether reasonable compensation was paid to the S corporation shareholders who work for the corporation. S corporations and their shareholders are inclined to pay too little of compensation in order to reduce payroll taxes. Why might the auditors of a state tax agency be more concerned that an S corporation paid too much compensation to the shareholders?

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Definitions:

Job Cost Sheet

A document or record that tracks the expenses associated with a specific job or project, including materials, labor, and overhead costs.

Job Cost Sheets

Are documents used in cost accounting to record the materials, labor, and overhead costs associated with a specific job or project.

Actual Direct Material

The raw materials physically used in the manufacturing process, measured against the planned or standard materials cost.

Actual Manufacturing Overhead

The real costs incurred during production that are above direct labor and materials, including utilities, depreciation, and maintenance.