Archived

  • Three Court Cases that Define Reasonable Comp. for S Corps

    By Paul S. Hamann & Jack Salewski, CPA, CGMA The modern era for Reasonable Compensation for S Corps started in 2005 with a study of S Corporation Reporting Compliance.  This study spawned numerous reports that changed and shaped the way IRS examiners address non-compliance on the issues of Reasonable Compensation.  This change can be seen in

  • Timing S Corp Distributions to keep the IRS off your Back

    By Jack Salewski, CPA, CGMA When is the proper time to make a distribution of earnings and profits to an S Corporation’s shareholders? “I’ll just take distributions, then pay myself reasonable compensation at the end of the year.” Quack, quack. “Holding a meeting is a hassle. I’ll just write a check for my distribution when I

  • Elvis tells the IRS “Don’t Be Cruel”…

    By Stephen Kirkland, CPA, CMC, CFC, CFF (Guest Author) It has been more than 40 years since Elvis Presley faked his own death so that he could become a deserted-island based tax advisor. Back then, the IRS was auditing hundreds of C corporations, looking to see if they were over-compensating their shareholders. Elvis wanted to help.

  • Reasonable Compensation Top Ten

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Trying to get your S Corp clients to determine their reasonable compensation is a lot like trying to get a child to eat Brussels sprouts.  You can try to convince them that Brussels sprouts are good for you, while that pile of Brussels sprouts sits there

  • The Relationship Between Reasonable Compensation and Business Valuation

    By Jack Salewski, CPA, CGMA & Paul S. Hamann A common question in public practice is, “how much is my business worth?” This question comes up for a variety of reasons. It could be a business merger, sale of the business, divorce, death or even idle curiosity. There are a lot of different factors that

  • The Single Shareholder S Corp & Reasonable Compensation

    By Jack Salewski, CPA, CGMA & Paul S. Hamann “If there is only one shareholder and no other employees, should all distributions be taken out as Reasonable Compensation?” This is a common question we receive at RCReports and like with most of the questions we receive, the answer is: “Maybe.” If the business is so unique

  • 1099 or W-2 for S Corp Director Fees?

    By Paul S. Hamann & Jack Salewski, CPA, CGMA What is the correct treatment of Director’s Fees? Is it a W-2 or a 1099? Let’s take an in-depth dive into this question. If you were to look at the issue without a lot of critical thought you might conclude that the Director’s compensation should be

  • Wiley L. Barron, CPA, LTD. v. Commissioner of Internal Revenue

    by Beanna J. Whitlock, EA CSA (Guest Author) T.C. Summary Opinion 2001-10 February 7, 2001 Having become very familiar with the court case, Wiley Barron became easy to talk about, particularly when it came to Sub-Chapter S Corporations and reasonable compensation. Mr. Barron’s office was located in Pine Bluff, Arkansas. His S Corporation, of which

  • 4 (free) Tools that make Reasonable Compensation Compliance a breeze

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Watching the leaves in free fall inspired us at RCReports to put together four free resources for you. All of these tools (and more) are free for RCReports account holders. If Reasonable Compensation has been a tough subject to bring up with your clients, offering these free tools

  • 1099 or W-2 for Shareholder-employees of S Corps?

    By Paul S. Hamann & Jack Salewski, CPA, CGMA 1099 or W-2?  That’s the top 10 question Jack receives here at RCReports. Answer: W-2 We hear your rebuttal:  Paying wages via 1099-MISC instead of W-2 has no tax effect!  True, if you’re considering only FICA taxes.  However, other government entities, both state and local, also

  • No Tax Court for Reasonable Compensation Re-Characterization

    By Paul S. Hamann & Jack Salewski, CPA, CGMA In a recent memorandum to its agents and examiners, the IRS lays out steps to keep Reasonable Compensation challenges out of Tax Court.  Great, you say, nobody wants to go to court! Not so fast. The option of filing a petition in Tax Court provides taxpayers with time

  • Three Methods of Determining Reasonable Compensation Part III: The Income Approach

    By Paul S. Hamann & Jack Salewski, CPA, CGMA There are three generally accepted methods for determining Reasonable Compensation for the owner of a closely-held business. It is important to match each method with the business’s size and business owner’s job duties. The Cost approach, aka many hats, approach: Generally works best for small businesses

  • Three Methods of Determining Reasonable Compensation Part II: The Market Approach

    By Paul S. Hamann & Jack Salewski, CPA, CGMA There are three generally accepted methods for determining Reasonable Compensation for the owner of a closely-held business. It is important to match each method with the business’s size and business owner’s job duties. The Cost approach, aka many hats, approach: Generally works best for small businesses

  • Three Methods of Determining Reasonable Compensation Part I: The Cost Approach

    By Paul S. Hamann & Jack Salewski, CPA, CGMA There are three generally accepted methods for determining reasonable compensation for the owner of a closely-held business. It is important to match each method with the business’s size and business owner’s job duties. The Cost approach, aka many hats, approach: Generally works best for small businesses where

  • The Relationship Between Reasonable Compensation and Business Valuation

    By Jack Salewski, CPA, CGMA & Paul S. Hamann A common question in public practice is, “how much is my business worth?” This question comes up for a variety of reasons. It could be a business merger, sale of the business, divorce, death or even idle curiosity. There are a lot of different factors that

  • How an S Corp can Lose Money and Still be Required to Pay Reasonable Compensation

    By Paul S. Hamann & Jack Salewski, CPA, CGMA This scenario is possible because Reasonable Compensation is not tied to Profit or Loss but to Distributions.   The IRS guidelines for Reasonable Compensation state: The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.  It does not mention profit

  • Reasonable Compensation Year End Check List

    By Paul S. Hamann & Jack Salewski, CPA, CGMA I am not a big fan of checklists or New Year’s resolutions, but – there’s always a but –that being said, they are helpful in an annoying sort of way. So, in an attempt to use a checklist and New Year’s resolution for good I have

  • A Sincere Thank You to all who answered my “Quick Question”!

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Since we released RCReports V1 almost five years ago I have asked users WHY? Why did you register? Why did you subscribe? Why did you renew? The answers have helped us better understand how RCReports was being used, where it was helpful, and where it needed

  • Reasonable Compensation and the Single Shareholder S Corp

    By Jack Salewski, CPA, CGMA & Paul S. Hamann “If there is only one shareholder and no other employees, should all distributions be taken out as Reasonable Compensation?” This is a common question we receive at RCReports and like with most of the questions we receive, the answer is: “Maybe.” If the business is so

  • Reasonable Compensation and Multiple S Corps

    By Jack Salewski, CPA, CGMA & Paul S. Hamann There are numerous issues when a business owner is a shareholder in more than one S Corp. Does the shareholder have to complete a reasonable compensation assessment (RCA) for each corporation, or will one assessment do? Does each corporation need to pay wages? What happens if

  • Profit v. Distribution and its effect on Reasonable Compensation Part II

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Last month we walked through three basic examples of how distributions affect Reasonable Compensation.  If you missed it or need a refresher click on this link.  This month we will dive into two more complex examples: The first explores Reasonable Compensation and look back periods. The second

  • Profit v. Distribution and its effect on Reasonable Compensation Part I

    By Paul S. Hamann & Jack Salewski, CPA, CGMA How does profitability factor into a Reasonable Compensation calculation?  That is one of the most frequent questions we receive.  The short answer is: “Very little.”  To help you understand why, we’ll describe a few scenarios below and next month.  First, a few guidelines:

  • Determining Reasonable Compensation using the Cost Approach

    By Paul S. Hamann & Jack Salewski, CPA, CGMA The old adage “Simple isn’t always easy” perfectly sums up the IRS and Court guidelines for determining Reasonable Compensation for an S Corp owner.  At first blush the IRS and court guidelines seem simple enough – but once you start to follow the roadmap the IRS

  • Top 10 Reasonable Compensation points to discuss with your Clients before December 31st

    By Paul S. Hamann & Jack Salewski, CPA, CGMA With tax planning in full swing, we have compiled a Top Ten To Do List. 1. Determine an Accurate Reasonable Compensation figure for Every Client. Without an accurate reasonable compensation figure, the rest of tax planning is just a guess. Research and documentation is the best

  • Reasonable Compensation Planning Season Part II: Profitable Schedule C Filers, LLC’s & Partnerships

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Planning Season is a good time to sit down with your profitable Schedule C, LLC’s & Partnerships to discuss the potential tax savings of changing to an S Corp.  Shareholder-employees of S Corps only pay employment taxes on their Reasonable Compensation versus Sole Proprietors, LLC’s and

  • Reasonable Compensation Planning Season Part I: Profitable S & C Corps

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Third quarter already – are you kidding me.  This year, like most, has zipped by.  Soon the last tax deadline will have come and gone, and “Planning Season” will start.  There are two groups of small business clients you should start checking in with as early

  • Are you Still using a ‘Rule of Thumb’ to Calculate Reasonable Compensation?

    By Paul S. Hamann & Jack Salewski, CPA, CGMA If you answered yes, my next question is why?  I was at a neighborhood wine party last week and had a conversation with Justin (not really his name).  I met Justin last year at the same event – a nice young man and entrepreneur who was

  • The Unintended Consequences of Not Having Reasonable Compensation

    By Jack Salewski, CPA, CGMA & Paul S. Hamann Calculating Reasonable Compensation for an S Corp; C Corp; Small or Closely-Held business owner is not just about making the IRS happy.  There are many unintended consequences of not having reasonable compensation. They can be broken down into current; long-term; valuation; entity choice; and preparer issues.

  • The IRS Job Aid for Determining Reasonable Compensation

    By Paul S. Hamann & Jack Salewski, CPA, CGMA A few months ago an internal IRS Job Aid (Appendix) for determining Reasonable Compensation became public.  The Job Aid was developed by a team of IRS valuation professionals from the Large Business and International Division.  Can this job aid provide insight on determining Reasonable Compensation for Small Closely-Held businesses? 

  • The Unintended Consequences of Not Having Reasonable Compensation (Part II)

    By Jack Salewski, CPA, CGMA & Paul S. Hamann Calculating Reasonable Compensation for an S Corp; C Corp; Small or Closely-Held business owner is not just about making the IRS happy.  There are many unintended consequences of not having reasonable compensation. They can be broken down into current; long-term; valuation; entity choice; and preparer issues.

  • Three Tips to Reach Expert Status in Your Market

    By Salim Omar (Guest Author) One of the most powerful ways to grow your CPA practice is to develop a strong personal brand and establish yourself as an expert, your client’s trusted advisor.  When individuals and businesses go shopping for a CPA firm, they’re buying more than just services – they’re buying a relationship with

  • You’re Busy We’ll Keep it Brief

    By Paul S. Hamann & Jack Salewski, CPA, CGMA A big thank you for making RCReports The Leader in Determining Reasonable Compensation for S Corps, Small and Closely Held Business Owners.  We know you are in the depths of tax season so we’ll keep it brief. When you come up for air after tax season, login to

  • Step by Step: How to Determine Reasonable Compensation for an S Corp Owner

    By Paul S. Hamann & Jack Salewski, CPA, CGMA The old adage “Simple isn’t always easy” perfectly sums up the IRS and Court guidelines for determining Reasonable Compensation for an S Corp owner.  At first blush the IRS and court guidelines seem simple enough – but once you start to follow the roadmap the IRS

  • Reasonable Compensation Year End Check List

    By Paul S. Hamann& Jack Salewski, CPA, CGMA I am not a big fan of checklists or New Year’s resolutions, but – there’s always a but –that being said, they are helpful in an annoying sort of way.  So, in an attempt to use a checklist and New Year’s resolution for good I have put

  • Three Court Cases that Define the Modern Era of Reasonable Compensation

    By Paul S. Hamann & Jack Salewski, CPA, CGMA The modern era for Reasonable Compensation for S Corps started in 2005 with a study of S Corporation Reporting Compliance.  This study spawned numerous reports that changed and shaped the way IRS examiners address non-compliance on the issues of Reasonable Compensation.  This change can be seen in

  • 5 Benefits of Reasonable Compensation Planning for you and your Client

    By Paul S. Hamann & Jack Salewski, CPA, CGMA Discussing Reasonable Compensation with your clients is a bummer, most of the time.  You are trying to corral your client into giving you a number that they have no idea how to calculate.  Both of you are tempted to just make something up, but you know

  • The Relationship Between Business Valuation and Reasonable Compensation

    By Jack Salewski, CPA, CGMA & Paul S. Hamann A common question in public practice is, “how much is my business worth?” This question comes up for a variety of reasons. It could be a business merger, sale of the business, divorce, death or even idle curiosity. There are a lot of different factors that

  • How an S Corp can Lose Money AND be Required to Pay Reasonable Compensation

    By Paul S. Hamann & Jack Salewski, CPA, CGMA (From our Archives) This scenario is possible because Reasonable Compensation is not tied to Profit or Loss but to Distributions.   The IRS guidelines for Reasonable Compensation state: The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.  It does not

  • Profitability V. Distribution

    By Paul S. Hamann & Jack Salewski, CPA One of the most frequent questions we receive is how profitability factors into a Reasonable Compensation calculation.  Unfortunately, Reasonable Compensation has very little to do with the Profit or Loss of an S Corp, and everything to do with the S Corp’s Distributions.

  • Hey – I’m Worth More Than That!

    By Paul S. Hamann & Jack Salewski, CPA “Hey – I’m worth more than that “is a phrase S Corp and Small Business Owners express quite frequently after researching their Reasonable Compensation figure.  Why? – Because most S Corp and Small Business Owners don’t understand what Reasonable Compensation is.  They mistakenly equate Reasonable Compensation with their dedication and

  • Your Best Strategy for Surviving an IRS Reasonable Compensation Challenge

    By Paul S. Hamann There are two ways to survive an IRS Reasonable Compensation challenge.  The first is a proactive strategy, getting all your clients ducks in a row ahead of time so you are prepared if the Reasonable Compensation figure is challenged.   The second is a desperate last-minute struggle to defend a Reasonable Compensation

  • How Much am I worth? It depends who’s asking…

    By Paul S. Hamann What am I worth is an interesting question because it largely depends on who’s asking and why?  An insurance advisor is considering your future.  A headhunter is examining your track record and potential.  A mineralogist would be assessing the value of your trace elements (about $160 for the average person).  But

  • Short & Sweet this Month

    By Paul S. Hamann A big thank you to all of our users!  Thanks for making RCReports the go-to solution for CPA’s and Financial Advisors when Reasonable Compensation is on the line.  We know you are in the depths of tax season so we are keeping this month’s newsletter short – see below for the

  • The Year in Review & The Year Ahead

    By Paul S. Hamann The Year In Review: 2013 brought us some great insight into the field of Reasonable Compensation by way of the McAlary case. Compensation Agreements – McAlary had a Compensation Agreement, but the courts didn’t buy it: “We are not persuaded that the remuneration agreement represents a sound measure of the value of the services

  • Reasonable Compensation Winning and Losing Year-End Strategies

    By Paul S. Hamann It is important to talk with your S Corp clients now about their Reasonable Compensation.  Most S Corps, whose fiscal year matches the calendar year, must have their payroll completed before year-end.  Waiting until next year to address this issue with your clients could cost them big.

  • Why S Corp Owners Require a Custom Job Profile

    By Paul S. Hamann A small business owner I know jokes that his business card should read “President and Janitor” (and everything in between). So, when my friend tries to determine his reasonable compensation figure (at his accountant’s request), should he be compensated as President? Janitor? Or somewhere in between? Where in between?

  • McAlary v. IRS

    By Paul S. Hamann “Another one bites the dust.”  Just a line that popped into my head when I read the recent Reasonable Compensation (RC) case: Sean McAlary Ltd, Inc. v. Commissioner.  McAlary Ltd. joins a long list of S Corps that have lost their RC challenges in court, about 25 in all.  The McAlary case

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