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Defenders for this IRS position would say it comes home to Section 61. The waitress provided a service for me, and I paid for it. Compensation for services is taxable. End of account. Another angle to consider: suppose your business takes a loss of revenue for 12 months. As a C Corp there exists no tax on the loss, however there likewise no flow-through to the shareholders it seems an S Corp. Losing will not help your individual tax return at all.

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