RCR Blog
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BLOSSOM DAY CARE v. IRS Tests 20-Year-Old Precedent
- September 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
“Too clever is dumb” quipped the humorous poet Ogden Nash. He wasn’t wrong. A couple named Hacker found that out the hard way, and by that we mean the expensive way.
It has been about seven or eight years since we last had an S Corp Reasonable Compensation challenge come out of the tax courts. In the author’s humble opinion, that’s because there is very little left for taxpayers to test out in court. Most issues have already come up. Precedents have been established.
That didn’t stop the owners of Blossom Day Care (Barry Hacker and Celeste Hacker – The Hackers) from spending a decade and (likely) tens of thousands of dollars trying to subvert Revenue Ruling 74-44 and a 20-year-old plus precedent that classifies corporate officers as employees. (more…)
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Fact or Fiction – How are you advising your clients?
- August 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
We recently polled 993 CPAs, EA’s, and other tax professionals to find out if they could recognize fact from fiction as it applies to the IRS’s guidance on how to determine reasonable compensation. 81% believed the fiction.
Here’s what we asked: Which of the following methods of determining reasonable compensation are recognized by the IRS?
A. Industry Rule (Set wages as a percentage of sales or revenue based on industry standards)
B. 50/50 Rule (50% distribution – 50% Wages)
C. Safe Harbor Rule (Set wages at the S.S. Max)
D. All the above
E. None of the above
81% selected A,B,C or D – all of which are myths. Congratulations to the 19% who got it right.
So, what gives? Why do so many accountants believe these myths are “rules”? (more…)
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Don’t Get Ambushed: The IRS Is Arming and So Should You
- July 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
For two decades the IRS has been preparing an assault on reasonable compensation for S Corporations. Their arsenal is now fully stocked. In it there’s everything from commonsense tools to obscure memos. Get ready. Arm yourself with facts and data, because fiction and myths aren’t going to protect you.
COVID gave S Corps a short cease fire. By 2019 examiners had been trained to address the long-standing concern over inadequate reasonable compensation and bring S Corp. owners into compliance. Audits picked up. A look at this new initiative was to follow in 2020 with a TIGTA report, then COVID hit. Last year saw little activity and the TIGTA report was never produced.
So, will the IRS resume its assault on S Corps and owners’ compensation in 2021? We consulted our magic eight ball for the answer, but it was little help [Ask Again Later]. Our best advice is to get ready, because even if the IRS doesn’t show up in 2021, they are still likely to show up soon, locked and loaded. (more…)
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How the IRS Determines Reasonable Compensation using the IRS Job Aid
- June 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Over the last decade the IRS has steadily and methodically tackled the compliance hassle that is reasonable compensation. According to an exhaustive 2009 GAO Report, S Corps were under-reporting shareholder compensation by more than $23 billion (for tax years 2003-2004) (Ruh-Roh Reorge!)
A few years later the IRS put together a game plan for its staff. This internal “Job Aid” sets out when and how penalties should be assessed and details three approaches for determining reasonable compensation. It also comes with a warning: “This Job Aid is not an official pronouncement of law…” In sports lingo, the courts are still going to referee, but at least now we understand the rules of the game. We’re no longer playing Calvinball, making it up as we go along (shout out to you Calvin & Hobbes fans!) and that was a huge win for tax preparers and taxpayers.
With the likelihood of increased audit attention on S Corps (more on this next month), moving your approach from myths or guessing to employing a fact-based strategy (as outlined in the IRS Job Aid) will greatly reduce risk for the preparer (Are You at Risk for Preparer Penalties?) and S Corp that may be relying on myths such as “Rules of Thumb” or “Safe Harbors”.
The three approaches discussed in the Job Aid are: (more…)
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Reasonable Compensation for all your S Corps in Three EZ Steps
- May 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
“The only reason for time is so that everything doesn’t happen at once.” Albert Einstein
Use time to your advantage! Here’s how one RCReports subscriber brought every S Corp he worked with into Reasonable Compensation compliance in three easy steps. (Full disclosure: The steps below assume you have an RCReports account.)
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Are You Using the Right Approach to determine Reasonable Compensation?
- April 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
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.
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How should the Directors of an S Corp be paid: 1099 or W-2?
- March 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
The most common question we receive is if an S Corp owner can pay themselves via 1099 or must it be W-2. (Find the answer HERE)
But 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. (more…)
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Strategies for Reasonable Compensation and Multiple S Corps
- February 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
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 the owner is above the Social Security maximum?
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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…)