RCR Blog
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Rule of Thumb Used to Calculate Reasonable Compensation Shot Down in Court
- January 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Accountants are facts and figures folk. Accountants rely on data and analysis, not myths and tales.
Well, not always. In 2020 we asked 4,671 Tax Advisors if the IRS recognized Rules of Thumb such as a 50/50 split between distributions and reasonable compensation. Thirty-three percent said yes.
The IRS “Rule of Thumb” is a myth. But it’s a fact that we found 1,555 professional accountants who relied on this myth. (more…)
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10 Reasonable Comp Points to Cover with Your Clients this December
- December 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Without an accurate Reasonable Compensation figure, tax planning is just a guess. (more…)
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COVID Distribution Strategy for S Corps – Avoid a 15% Reasonable Compensation Penalty
- November 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
COVID has taught us a lot about protecting ourselves, and not just about wearing a mask. We’ve learned a lesson on how to use distributions to protect a company’s assets during any prolonged crisis.
Distributions are the expected reward for a well-run company. Plus, distributions protect funds from being at risk if the company gets involved in litigation. But a third reason for distributions you may have never considered is what CPA David Kolts dubs the 15% Reasonable Compensation Penalty. (Penalty here refers to consequence or disadvantage, not punishment.) (more…)
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Should you adjust Reasonable Compensation in the age of COVID?
- October 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
COVID is affecting everything in 2020, and that includes Reasonable Compensation. Business owners may be putting in more hours, or less, taking on new on-line tasks, or giving themselves a pay cut along with their employees. As businesses adapt to the pandemic, Reasonable Compensation calculations must be adjusted as well. “Set it and forget it” doesn’t work anymore in 2020.
What adjustments are warranted? There are three primary adjustments you should consider discussing with your S Corp. owners before the end of the year and a few others you should be aware of. (more…)
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The Benefits of Establishing Reasonable Compensation
- September 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Jack Salewski, CPA, CGMA & Paul S. Hamann
We find it perplexing how often S Corp. owners – who invest in their business with an eye on the future and carefully analyze the cost/benefit of every decision – take a short-term, simplistic approach to reasonable compensation: Just pick the lowest possible number to minimize payroll taxes.
A reasonable compensation calculation impacts far more than just this year’s payroll tax. Talking with your clients about the benefits of accurately establishing compensation can be a life saver in retirement, sale or transfer of the business, or in the event of disability. (more…)
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Practice Development + Reasonable Compensation
- August 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
As we approach planning season and you take stock of your practice, think about your clients who are a pleasure to work with, have unique needs or complex situations; you may realize you find yourself thinking about your small and medium business (SMB) clients. A demanding bunch for the most part, as they should be. They have engaged you to watch out for their best interests, and to point out tax and business strategies that will continue to help their business prosper; you are, after all, their trusted advisor.
One of the hard and fast rules of working with SMB’s is the need to regularly advise them on the topic of Reasonable Compensation. The subject comes up from darn near the first conversation – when they are forming the business and choosing their entity, to the day when the business is sold or passed down to the next generation, waiting in the wings. (more…)
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What is Reasonable Compensation?
- July 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Back to basics. “What is Reasonable Compensation?” (Or, what is meant by Normalizing Owner’s Comp.?)
You get it. CPAs, EA’s, tax and business advisors learn about reasonable compensation in college and continuing education. Not so for business owners. Most business owners have only heard about reasonable compensation from one person – you. Are you explaining it so they “get it” as well as you do? (more…)
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Anatomy of an IRS Reasonable Compensation Challenge
- June 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Jack Salewski, CPA, CGMA & Michael E. Breslin CPA, MST, JD
What does an IRS reasonable compensation challenge look like from A-Z? Following is an analysis of a recent reasonable compensation challenge for a real estate agent in the Northeast handled by tax attorney Mike Breslin:
An S Corp owner has a fantastic year. More zeros than he’s ever seen. Then comes “The Letter” from the IRS.
That’s what happened to tax attorney Mike Breslin’s client. A real estate agent had a banner year, primarily because of one huge sale, more than doubling his usual income. But, like every other year in his career, he claimed no reasonable compensation on his S Corp tax return. (more…)
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Reasonable Compensation & the PPP
- May 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Beanna J. Whitlock, EA CSA
Executive Director ncpeFellowship, an internet organization for tax professionals who are serious about the business of tax – https://ncpefellowship.com/What a relief it was to hear these magic words: “My S Corp pays me as an employee based on the services I provide to the company.” Whew!
Why? Because the Paycheck Protection Program (PPP) offers loans for payroll. So when we helped these S Corp. clients apply for PPP loans, we felt confident they were compliant with the SBA guidelines and were eligible for help. What a relief it was when their loans were approved!
But not all S Corps got it right. In spite of years of informing, cajoling and even threatening, some of our clients have continued to refuse to pay reasonable compensation. Instead the shareholder/employee continued to take compensation as loan repayments, rents and distributions.
Then the world changed: COVID-19 (more…)
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Reasonable Compensation & the Single Shareholder S Corp
- April 1, 2020
- Posted by: Paul Hamann
- Category: Blog
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.” (more…)