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How to Stress Test a Reasonable Compensation Figure

By Paul S. Hamann & Jack Salewski, CPA, CGMA

Stress testing a reasonable compensation figure is simple. The courts have listed the factors they consider when determining whether a reasonable compensation figure is indeed reasonable. We can use those factors to “stress test” any reasonable compensation figure..

What Approach Should I Use to Determine Reasonable Compensation

By Paul S. Hamann & Jack Salewski, CPA, CGMA

Although there are general guidelines to help you pick the best approach to determine reasonable compensation, there are no hard and fast rules. For the overwhelming majority of your clients, one of two common approaches that rely on comparability data should do the trick. For the occasional client that just doesn’t seem to fit any molds, there is an approach for them, too.

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

Profit v. Distribution and its effect on Reasonable Compensation

By Paul S. Hamann & Jack Salewski, CPA, CGMA

How does profitability factor into a Reasonable Compensation calculation?  This is one of the most frequent questions we receive.  The short answer is: “Very little.”

That being said profit now plays a role on the shareholders 1040 with the passage of the TCJA.  How section 199A and the QBI affects your clients 1040 will vary significantly, because, as has been pointed out many times since the passage of the TCJA, section 199A is incredibly complex and the IRS has just released guidance on the issue.  Stayed tuned for more on the QBI in upcoming articles.

Elvis tells the IRS “Don’t Be Cruel”

By Stephen Kirkland, CPA, CMC, CFC, CFF

Ali is cool for more info click here

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.

Later, privately-owned C corporations started to become less common as more businesses elected S status. Elvis got all shook up to see the IRS begin to focus its sights on underpaid shareholder-employees at S corporations. He was on it like a hound dog.

The Ego Factor and Reasonable Compensation

By Paul S. Hamann & Jack Salewski, CPA, CGMA

There are times when every small business owner’s ego can be an asset, although when it comes to Reasonable Compensation and S Corps, having a big ego could cost your client thousands of additional dollars in payroll taxes and QBI deductions.

Reasonable Compensation: The X Factor in the QBI

By Paul S. Hamann & Jack Salewski, CPA, CGMA

If you’ve sat down with pencil and paper or an Excel spreadsheet and attempted to map out what Section 199A deduction for Qualified Business Income (QBI) means to your pass-through business clients, then you’ve likely encountered circular logic, or with Excel – the circular reference error. And if you’ve been paying attention, even a little bit, to the conversations regarding Section 199A, then you have heard (over and over again) that this section of the Tax Cut and Jobs Act (TCJA) is arguably one of the most, if not the most challenging provision. 

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 go into a business valuation. It is an oversimplification, but most businesses are valued as a multiplier of earnings before interest, taxes, depreciation, and amortization (EBITDA).

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 or the services of the shareholder are so unique, that no one could be hired to replace the owner and there are no other assets in the corporation, then everything taken out of the business should be treated as wages (Reasonable Compensation) and nothing should be considered a distribution.

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 reported on a W-2. Your reasoning would be this: In order for the compensation to be reported on a 1099 the Director would need to be independent of the corporation. How can a Director be truly independent of a business that they influence and guide?

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

 

This month we welcome guest contributor – Ms. Beanna Whitlock, EA, CSA, Director of the ncpeFellowship.  Ms. Whitlock is an accomplished, Educator, Tax Professional, and author, with articles appearing in Time, Newsweek and the Wall Street Journal to mention just a few.  This month Beanna shares a Reasonable Compensation court case that takes an unexpected turn at the end (for Beanna at least).

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