Reasonable Compensation

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

Is credible data really that important? Yes. In one recent case, data convinced an IRS Examiner to abandon an unreasonable position, saving the taxpayer thousands of dollars. In the process, the CPA, whose data-less compensation guess attracted the audit in the first place, saw his reputation tarnished. But the reputation of the taxpayer’s data-driven CPA rescuer is looking even brighter. (more…)

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

The most popular methods for computing reasonable compensation are, like the cool kids in high school, cute and fun to hang around with, but not who you need at your side come finals week. Conventional Wisdom, Rule of Thumb, and Safe Harbor methodologies win the popularity contest among accountants, but all three get an “F” in front of tax court judges.

We recently polled 4,541 CPAs, EA’s, and other tax professionals. Here’s what we asked: Which of the following methods of determining reasonable compensation are recognized by the IRS? (more…)

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

“Too clever is dumb” quipped the humorous poet Ogden Nash. He wasn’t wrong. A couple of named Hacker found that out the hard way, and by that we mean the expensive way.

It has been about seven or eight years since we last had an S Corp Reasonable Compensation challenge come out of the tax courts. In the author’s humble opinion, that’s because there is very little left for taxpayers to test out in court. Most issues have already come up. Precedents have been established.

That didn’t stop the owners of Blossom Day Care (Barry Hacker and Celeste Hacker – The Hackers) from spending a decade and (likely) tens of thousands of dollars trying to subvert Revenue Ruling 74-44 and a 20-year-old plus precedent that classifies corporate officers as employees. (more…)

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

We recently polled 993 CPAs, EA’s, and other tax professionals to find out if they could recognize fact from fiction as it applies to the IRS’s guidance on how to determine reasonable compensation. 81% believed the fiction.

Here’s what we asked: Which of the following methods of determining reasonable compensation are recognized by the IRS?

A. Industry Rule (Set wages as a percentage of sales or revenue based on industry standards)

B. 50/50 Rule (50% distribution – 50% Wages)

C. Safe Harbor Rule (Set wages at the S.S. Max)

D. All the above

E. None of the above

81% selected A, B, C, or D – all of which are myths. Congratulations to the 19% who got it right.

So, what gives? Why do so many accountants believe these myths are “rules”? (more…)

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

For two decades the IRS has been preparing an assault on reasonable compensation for S Corporations. Their arsenal is now fully stocked. In it, there’s everything from commonsense tools to obscure memos. Get ready. Arm yourself with facts and data, because fiction and myths aren’t going to protect you.

COVID gave S Corps a short cease-fire. By 2019 examiners had been trained to address the long-standing concern over inadequate reasonable compensation and bring S Corp. owners into compliance.  Audits picked up. A look at this new initiative was to follow in 2020 with a TIGTA report, then COVID hit. Last year saw little activity and the TIGTA report was never produced.

So, will the IRS resume its assault on S Corps and owners’ compensation in 2021? We consulted our magic eight ball for the answer, but it was little help [Ask Again Later]. Our best advice is to get ready, because even if the IRS doesn’t show up in 2021, they are still likely to show up soon, locked and loaded. (more…)