FINC 355 Week 1-3 Discussion

Discuss factors involved in determining reasonable compensation.

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As described in chapter two, the Internal Revenue Code allows employers who carries on a trade or business to deduct a reasonable compensation allowance for salaries and other personal services rendered. In order to do so, the company’s payment must meet a reasonableness test which reviews several factors to determine if the compensation levels claimed are reasonable in comparison to the company’s profits and the services provided. These factors include the following:

1.Compensation paid to the company’s executives in comparison to executives at comparable companies with similar positions.

2.The qualifications of the employee in the position.

3.The scope of duties performed by that employee.

4.The complexity of the organization and its size.

5.Analysis of the compensation paid compared to the company’s net and gross income.

6.The compensation policy in place for all of the organization’s employees.

7.Economic conditions on local and national industry levels.

8.Comparison of compensation to the dividend distributions to shareholders.

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