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…)

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.

Let’s look at an example: Meet Joan and her over-inflated alter ego Joanna.

When Joanna completes a Reasonable Compensation survey, she does so with an immensely inflated ego. She doesn’t bother to read the job descriptions and selects tasks based solely on title; there is no task Joanna –doesn’t consider herself awesome at completing; so she rates her skill level as high for each selected task on the survey. (more…)

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

 “I’ll just take distributions, then pay myself reasonable compensation at the end of the year.” Quack, quack.

“Holding a meeting is a hassle. I’ll just write a check for my distribution when I do payroll.” Waddle, waddle.

Reasonable compensation is payment for the value of work performed by an S Corp shareholder/owner.  Distributions are whatever the Board of Directors deems appropriate (votes on).  These are two different events. (more…)

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

So how do you know if your S Corp client’s Compensation is Unreasonable? The most efficient way is to stress test it (download stress test here). Outside of stress testing compensation, the next best strategy is to compile credible documentation to back up the Reasonable Compensation figure being used.

There is no absolute right answer when it comes to Reasonable Compensation – but there are many wrong ones! Such as: I guessed; I split my distribution 50/50; or any other answer that involves a WAG.  In other words, any answer that does not rely on supporting information is a wrong answer, because it will have little credibility with the IRS. (more…)

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

The old adage “Simple isn’t always easy” perfectly sums up the IRS and Court guidelines for determining Reasonable Compensation.  At first blush the IRS and court guidelines seem simple enough – but once you start to follow the road map the IRS and Courts have laid out – simple quickly turns to challenging.

Following are five steps for calculating Reasonable Compensation for any closely-held business owner: (more…)

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

Without an accurate Reasonable Compensation figure, tax planning is just a guess.

1. Educate. Send an issue letter so your clients are thinking about Reasonable Compensation before you meet.

• Most S Corp owners, once they understand the issue, will follow your advice as their Trusted Advisor. For those who don’t, sharing the issue letter will document your attempt to do so.
• Download Issue letter HERE

2. Stress Test. Is your client’s Compensation figure Reasonable?

• If it fails the stress test, it likely won’t survive a Reasonable Compensation challenge.
• Download Stress Test HERE

3. Research. Provide an accurate, independent Reasonable Compensation Report to each shareholder-employee.

• Research and documentation is now a “must have” with the passage of the TCJA. (more…)