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A Bullet Proof Vest for your Reasonable Compensation Figure

By Paul S. Hamann

Corporate law requires certain important decisions to be made by a company’s board of directors, such as setting the salary of its chief executive officer.  In many S Corp’s the board of directors is under the control of the president or even consists of one person: the president.  Under those circumstances, it is a little too easy to get sloppy in setting or changing the president’s salary based on the company’s cash flow without attention to corporate formalities.  In a worst-case scenario, the sole shareholder/sole director/president takes whatever money he or she wants out of the company, leaving it to their CPA to figure out after the fact (usually when tax returns are being prepared the following year) how much to characterize as salary and how much as distribution.

The IRS and tax courts have made it clear that an S Corp shareholder-employee (SE) should both research and document how their Reasonable Compensation (RC) figure was reached.  A former IRS agent commented that then adopting that research and documentation into the corporate minutes would, in his opinion, make the RC figure bullet-proof, (as long as it was done in the year in question, not the day after an audit commenced).

And who is the S Corp owner looking to for help with this issue?  Their CPA.  Three-quarters of all small businesses look to their CPA on issues such as this because of the complexity of the tax code.  RCReports was designed as a tool for CPA’s to use when advising their clients on the issue of RC.  We make it easy for your clients to research, determine and document their reasonable compensation figure.  To help S Corp owners who may not think in legal terms, RCReports provides a template for board minutes adopting an SE salary based on our Reasonable Compensation Report.

RCReports was created with input from dozens of CPA’s with decades of experience.  The RCReports dashboard and client interface are designed around how a CPA practice functions.  Our dashboard allows everyone within a practice to work from the same account.  The administrator of the account can grant or revoke permissions of other users based on their function or status.  Our software runs in the cloud through your web browser and is regularly being updated, which means there’s never any software to buy or upgrade and your data is always backed up.  There is no cost or obligation to create an account, RCReports is a pay as you go application, with the option (coming soon) for annual subscriptions for regular users.

So as the go-to advisor for the overwhelming majority of S Corps, log in to (or create) your RCReports dashboard, and begin protecting and advising your clients today.

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