In this case, Eli and Rebecca received three types of benefits from Rebeli Press: salaries; medical insurance; and dividends. They could have chosen to make a different mix of these payments. For example, they could have paid a year-end bonus, instead of giving themselves dividends. They could also have decided that the company would not pay for medical insurance.

Instead, they would have received higher dividends, from which they could have paid their own insurance.

Tax rules treat dividends, salaries, and benefit payments differently. Dividends are not deductible by a corporation, but salaries and benefit payments are.

Businesses can fully deduct employee medical insurance costs from their taxes, but usually individual taxpayers cannot. Salary and bonus payments are subject to employer payroll taxes, and the individual has to pay social security taxes and Medicare taxes on them. These taxes do not apply to dividend payments.

A. If you were an owner, would you try to take money out in a way that minimized taxes?

B. Do you see a decision characterizing a year-end payment in a way that minimizes taxes as being unethical?