Part 2 C Corporations question: salary for part-time work worth

Part 2C Corporations

A closely held C corporation paid its sole shareholder-officer a $900,000 salary for part-time work worth about $150,000. On examination, the IRS is likely to:

A Treat the excess as a nondeductible dividend
B Allow the whole salary as a deduction
C Reclassify the excess as a loan to the officer
D Treat the excess as tax-free to the officer

Show the answer and explanation

Answer: A. Treat the excess as a nondeductible dividend

Compensation is deductible only if reasonable for services actually rendered. Payments that exceed reasonable compensation to a shareholder-employee of a C corporation are typically recharacterized as constructive dividends, not deductible by the corporation and still taxable to the shareholder. Source: IRC 162(a)(1); Treas. Reg. 1.162-7; Pub. 542 (Rev. 01-2024). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Assuming any salary paid to an owner is deductible.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.