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The Case for Building a Documentation Plan On Business Owner Compensation
Common sense suggests that business owners, among their numerous tasks, should seek to minimize income taxes as they would any other expense, of course accommodating to the extent necessary the needs of their business. In this regard, building a documentary record to support the various tax positions being taken may preserve an income tax deduction that otherwise would be lost. More specifically, regarding a controlling business owner's compensation, the opportunity to substantiate with relevant documentation the value of the services performed by the owner on behalf of the business should not be ignored.
A recent case suggesting the potential benefit of such planning is Clary Hood v. Commissioner, 69 F.4th 168 (4th Cir.2023), aff'd in part, etc., TCM 2022-15 (U.S. Tax Court 2022), involving the deductibility for income tax purposes of compensation paid to the business owner.
'Hood' v. Commissioner
Clary Hood, a talented entrepreneur and business owner, together with his wife, Gail Hood, established and successfully grew the business of Clary Hood, Inc. (the Company) from a modest two-person operation in 1980 to one employing 150 people and earning revenues of close to $70 million by 2016. Having grown up in and around his father's construction business, where Clary devoted much attention to the grading and excavation of land, Clary and Gail struck out on their own in 1980 by forming the Company to specialize in land grading and excavation, generally as a subcontractor in various construction projects in South Carolina.
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