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

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 and Courts have laid out – something simple quickly …

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Three Court Cases that Define Reasonable Comp. for S Corps

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 the differences between Pre-2005 court cases and Post-2005 court …

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5 Benefits of Reasonable Compensation Planning for you and your Client

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 that an erroneous number if challenged by the IRS, …

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The Relationship Between Business Valuation and Reasonable Compensation

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 go into a business valuation. It is an oversimplification, …

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

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 or loss at all but instead talks about ‘amounts …

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Profitability V. Distribution

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.

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Hey – I’m Worth More Than That!

“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 commitment to their business.

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Your Best Strategy for Surviving an IRS Reasonable Compensation Challenge

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 figure that may not …

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