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By Paul S. Hamann

The wrong answer goes something like this:  I guessed; I split my distribution 50/50, or any other answer that involves a WAG.  In other words, any answer that does not have supporting information will probably have little creditability with the IRS.  So if there are wrong answers how come there aren’t right answers?  The easiest way to think about this puzzle is to stop thinking “I need a right answer” and start thinking “I need a credible answer.”

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By Paul S. Hamann

It doesn’t seem that long ago that the best advice for determining reasonable compensation was a rule of thumb or safe harbor figure; boy, have things changed.  Beginning in 2005 the IRS launched a study of S Corp compliance.  Since launching this study the IRS has:

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By Paul S. Hamann

Mid-summer is a good time to take a break and share what others are saying about Reasonable Compensation.  This month I have assembled some of the most recent and poignant reports on Reasonable Compensation for Shareholder-Employees of S Corps from some big name publications, your peers and our government – Enjoy…

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By Paul S. Hamann

In the 1991 movie What about Bob, Bob Wiley (played by Bill Murray) asks Dr. Leo Marvin (played by Richard Dreyfuss) how best to conquer his phobias.  Dreyfuss deadpans, “Baby steps.”

I often think about this movie when I am asked by CPA’s and financial advisors about the best way to get their clients to comply with IRS guidelines on Reasonable Compensation for S Corps – My answer is the same as Richard Dreyfuss – “Baby Steps”. Start by sending them an Issue Letter on the subject; we provide our users with an issue letter that you can download and customize to fit your firm’s personality.  You may be surprised how many of your clients will be happy to comply, once they understand the issue and its tax implications and consequences.

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By Paul S. Hamann

Trying to get your S Corp clients to determine their reasonable compensation is a lot like trying to get a child to eat Brussels sprouts.  You can try to convince them that Brussels sprouts are good for you, while that pile of Brussels sprouts sits there just getting ever colder and even less appetizing.  But if you really want them eaten, you must put your foot down and require that the little green nemesis be eaten.

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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.

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By Paul S. Hamann

I know a small business owner (SBO) who jokes that his business card should read “President and Janitor” (and everything in between).  So, should my friend be compensated as President or Janitor (or where exactly in between)?  That’s the challenge you face when guiding an S-Corp client for determining Reasonable Compensation (RC).  The IRS guidelines for determining RC specifically say that “In addition to the shareholder-employee direct generation of gross receipts, the shareholder-employee should also be compensated for administrative work performed…”  In other words, the IRS wants SE’s to pay themselves RC for all the hats they wear for their S Corp.

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By Paul S. Hamann

One of the most frequent questions we receive on the issue of Reasonable Compensation (RC) for shareholder-employees (SE) of S Corp’s revolves around the profitability of the S Corp.  Unfortunately, RC has very little to do with the Profit or Loss of an S Corp, and everything to do with the S Corp’s Distributions.

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By Paul S. Hamann

In January RCReports was used effectively in an IRS audit appeal.  The CPA, armed with knowledge from our webinar, and a Reasonable Compensation Report generated by RCReports, was successful in lowering his client’s Reasonable Compensation figure from $100,000 to $60,000 – saving their client employment taxes, interest and penalties on $40,000!

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