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" ... The term “reasonable compensation” has a long tax history. For many years, the primary tax issue was whether the owner/employee of a C Corporation, as a way of increasing income tax deductions, was paying herself more compensation than was reasonable. Since a dividend paid to a shareholder isn’t tax deductible - while compensation is - the IRS wants to make sure the owner/employee isn’t disproportionately allocating owner payouts to salary and bonuses. If the IRS successfully recharacterizes compensation as disguised dividends, the business loses its tax deduction and incurs interest and penalties charges. ... "