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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 that an erroneous number if challenged by the IRS, is just going to be an even bigger bummer.  It can also cause your client to pay more payroll taxes than necessary, negatively affect the valuation of their business, or cause a poor choice of entity.

If you would like that conversation to be less of a bummer more of the time, a key benefit you can provide your clientele is Reasonable Compensation planning.  Knowing what your client’s Reasonable Compensation figure is each year will help you advise them accurately on a wide range of Small Business Issues.

  1. Entity Planning:  Knowing what your client’s Reasonable Compensation figure will play a large role in what entity you recommend.  Having an accurate Reasonable Compensation figure to put in your planning model will help demonstrate to your client why you recommend one entity type over another.
  2. Harm’s Way: Having an accurate Reasonable Compensation figure for your S Corp clients will help keep your client out of IRS crosshairs and ensure their Reasonable Compensation figure is as bulletproof as it can get.
  3. Exit Strategy: Owner’s and Key Management’s Reasonable Compensation figure prominently into the valuation of a business.  Having an accurate Reasonable Compensation figure will clear away the clouds that hover over a financial statement that have to be recast due to an unreasonable compensation figure.
  4. Successful Owner OR Underpaid Employee:  Would any employees come to work without knowing what their salary would be?  Hell no!  Why should a Small Business Owner be any different?  Knowing their Reasonable Compensation figure gives a Small Business Owner information they need to determine if they are an underpaid employee taking home less than their Reasonable Compensation figure OR a successful Small Business Owner taking home more than their Reasonable Compensation figure.
  5. Profit Center: Adding Reasonable Compensation planning to your practice is easy and profitable.  For each client you provide Reasonable Compensation planning, you will generate between $100 and $500 (depending on the scope of service you provide to accompany each Report).

Now is the time to get meetings scheduled with clients for after October 15. As a practitioner you will have more time and your clients can set things up correctly for the first of the year. This preparation will dovetail into year-end tax planning engagements effortlessly.  RCReports makes it easy and profitable to add Reasonable Compensation planning to your scope of services. (Click Here to learn more about RCReports)

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