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The IRS, with an affirmative ruling from the Tax Court, has disallowed an S corporation's deduction of the unpaid portion of the payroll expenses for employees who participated in the S corporation's employee stock ownership plan (ESOP). The IRS disallowed the deduction under IRC Sec. 267(b), saying that due to the ownership interest of the employees in the S corporation, they were related parties. The unpaid portion of payroll expenses would be deductible in subsequent years, once payment was made.

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