How do you know if Compensation is Unreasonable?
- January 1, 2020
- Posted by: RCR Admin Team
- Category: Blog
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…)