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Reasonable Compensation Top Ten

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

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 to be eaten, you must put your foot down and require that the little green nemesis be eaten.

 

There is a long list of reasons why an S Corp owner should determine their reasonable compensation, but the only method that consistently works time and time again is to put your foot down and tell your S Corp clients it’s for their own good and require them to do it.  Tom Ochsenschlager, former head of tax for the American Institute of CPAs, says pay and payroll tax issues are a frequent source of friction with clients: “Sometimes you have to take them to the woodshed and say, ‘You need to report more income as pay for personal services.” – Wall Street Journal

Top 10 reasons why a Shareholder-Employee of an S Corp should determine their reasonable compensation figure annually:

10 Experts anticipate the TCJA will shine a spotlight on Reasonable Compensation
9 The IRS cares and they are watching
8 Penalties and interest can more than double the amount of tax originally owed
7 Preparer Penalties.  Should you have known…
6 The Austin, TX IRS office has formed a task force focusing on Reasonable Compensation
5 A sign of things to come – see #6
4 Your Social Security account will thank you
3 Because looking down at your shoes for answers during an examination sucks
2 It is easy and affordable using RCReports
1 Because determining your reasonable compensation is preferable to eating Brussels sprouts

(Apologies to those of you who enjoy Brussels sprouts, as well as those of you who like to research and document Reasonable Compensation)

Preparer Penalties & Reasonable Compensation
Because the majority of S Corp owners do not understand Reasonable Compensation, it places the burden of educating them on their Tax Advisor. The IRS requires tax preparers to be proactive in asking for the right information necessary to prepare tax returns, even if it means the preparer will need to spend more time with the client during the preparation process. Asking the appropriate questions will keep the preparer out of the penalty box.  AICPA Tax Preparers Beware

 

 

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