In the last year of an S-corporation, is the IRS still stringent about maintaining the appropriate salary-to-distribution ratio for shareholder-employees?

The IRS requires that shareholder-employees of an S-corporation receive reasonable compensation for their services, regardless of whether it is the first or final year of the corporation. This means that even in the final year, the corporation must pay a reasonable salary before making any distributions to shareholder-employees. This ensures that payroll and income taxes are properly reported and paid. Failing to maintain reasonable compensation may result in the IRS reclassifying distributions as wages, which would subject the amounts to payroll taxes and potential penalties. Thus, it is crucial to continue observing proper salary-distribution practices in the final year of an S-corporation to remain compliant with tax regulations.