Many pros and cons of choosing bonuses over dividends. Wages and bonuses are tax deductible
for the company, while profits are not. Each dollar spent as a bonus saves the firm money since it is not
taxed. Dividend received deduction does not apply since dividends would be paid to workers rather than
companies. Dividends given to shareholders are taxed at a maximum of 20% if the firm earns and profits
more than payment of dividends (IRS, 2016). In this scenario, the firm has $300,000 in revenues and
profits and would pay $120,000 in dividends, therefore shareholders would be taxed on profits.
A higher tax rate of 20% might be favored by investors as it'd result in lower taxes rather than
include it in their taxable income. But, paying the incentive would benefit the firm far more since it would
reduce the amount of corporate tax. It is classified as a closely held corporation because there are only 12
stockholders. Remuneration is only refundable under 26 U.S. Code 162 if it is a reasonable amount for the
services done. Even if Bob pays his shareholders a bonus, it is possible that it may be judged an unfair
remuneration and categorized as a payout announced (IRS, 2016).
As a result, it makes the most sense for Bob to consider declaring dividends because it will
benefit the shareholders, and providing bonuses puts the firm at danger of having them reclassified as
dividends anyhow. If Bob decides to give each employee a new boat for $10,000 with an FMV of
$15,000, the firm will be taxed on a $60,000 capital gain on the distribution. Dividend income would be
taxed at a rate of 15% on a $15,000 basis for each shareholder (IRS, 2016). Instead of providing his
stockholders a yacht, Bob could consider declaring dividends. Dividends are not deductible, however he
can avoid paying taxes on the capital gain on the matrimonial assets.
The loan of the company plane has tax implications. Because the business jet is being utilized for
holiday purposes, it is deemed personal usage. If you utilize an employer-owned airline for personal
reasons, you are taxed on the flight's valuation as taxable income, according to Regs. Sec. 1.61-21(g)
(AICPA, 2017). Another way for Bob to reduce business taxes is to provide tax-free fringe perks. Some
additional benefits, including health insurance and educational help, are non-taxable and lower the
corporation's taxable revenue (IRS, 2017). All investors should gain as they're also workers of the firm.
References
26 CFR 1.61-21 - Taxation of fringe benefits. (n.d.). Retrieved from
https://www.law.cornell.edu/cfr/text/26/1.61-21
26 U.S. Code § 162 - Trade or business expenses. (n.d.). Retrieved from
https://www.law.cornell.edu/uscode/text/26/162
Publication 15-B (2017), Employer's Tax Guide to Fringe Benefits. (n.d.). Retrieved from
https://www.irs.gov/publications/p15b
Publication 542 (12/2016), Corporations. (n.d.). Retrieved from
https://www.irs.gov/publications/p542#en_US_201609_publink1000257844
