Reasonable Compensation
The salary an S-Corp owner-employee must pay themselves before taking tax-advantaged distributions. Must be comparable to what the role would pay on the open market. Set it too low and the IRS reclassifies distributions as salary (plus penalties). Set it too high and you lose the tax benefit. Getting this number right is the core of S-Corp tax planning.
Where This Matters
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Tax Strategy
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Entity Formation
Choosing and setting up the right business structure — LLC, S-Corp, C-Corp, partnership — with California-specific tax implications and long-term planning.
Related Terms
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Enterprise Value (EV)Seller's Discretionary Earnings (SDE)EBITDA MultipleQuality of Earnings (QoE)Add-BacksDue DiligenceLetter of Intent (LOI)Holdback (Escrow)Earn-OutAsset SaleStock Sale (Equity Sale)GoodwillPersonal GoodwillCommunity PropertySeparate PropertyPereira MethodVan Camp MethodTransmutationBuy-Sell AgreementShotgun Clause (Russian Roulette Clause)View all →