Reasonable (or replacement) owners’ compensation can be a hot button during IRS audits, divorces, shareholder disputes and other litigation matters involving the value of a private business. What’s appropriate depends on the facts and circumstances. Applying federal tax guidance The IRS is on the lookout for C corporations that pay employee/shareholders excessive salaries in place of dividends. This tactic lowers the overall taxes paid because salaries are a tax-deductible expense and dividends aren’t. Owners pay income tax on salaries at the personal level, but dividends are subject to double taxation (at the corporate level and at each owner’s personal tax rate). If the IRS decides that a C corp is overpaying owners, it may reclassify part of the owners’ salaries as dividends. For S corporations, the IRS looks...