Continued IRS Attack On ‘Zero Out' Of Profits

A prior article in this publication (IRS Attack on Zeroed Out Taxable Income in Recent Tax Court Cases) discussed the lessons that physician and other incorporated medical practice groups could learn from taxpayer losses in two then recent Tax Court cases in use of the “zero out” technique in the payment of compensation to the group's owners. Under this approach, the practice group typically compensates its physician-owners or other licensed professional shareholders by payment of a portion of the anticipated pre-tax operating profits as compensation (salary) in regular increments during the tax year and then it will distribute the bulk of its profits in bonuses that are paid at year-end. For practice groups organized as ‘C' corporations, the salary and year-end bonuses are deducted as compensation. As a result, the practice entity will pay little or no federal income taxes. The potential tax risk to this compensation method is that, depending on the facts and