Question

Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement?

What are the tax consequences if this requirement is not met?

Answer 1

As per the 162 (a) of the Internal Revenue Code,

Salaries and wages or any other emoluments paid by the employer to their employees shall be deductible for tax purposes if,

• They are ordinary and necessary business expenditure
• Such payments are not unreasonable. Ie., similar to what others within the industry pay.
• Such payments are made towards actual services provided by the employee
• Actually paid by the employer under cash basis or actually accrued during the year in case of accrual.

If any payment in form of expenditure is in it as per the above given condition/s then such payments or the part thereof shall be not deductible while computation of taxable profits of the employer.