Reasonable Compensation
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The Benefits of Establishing Reasonable Compensation
- September 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Jack Salewski, CPA, CGMA & Paul S. Hamann
We find it perplexing how often S Corp. owners – who invest in their business with an eye on the future and carefully analyze the cost/benefit of every decision – take a short-term, simplistic approach to reasonable compensation: Just pick the lowest possible number to minimize payroll taxes.
A reasonable compensation calculation impacts far more than just this year’s payroll tax. Talking with your clients about the benefits of accurately establishing compensation can be a life saver in retirement, sale or transfer of the business, or in the event of disability. (more…)
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What is Reasonable Compensation?
- July 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Back to basics. “What is Reasonable Compensation?” (Or, what is meant by Normalizing Owner’s Comp.?)
You get it. CPAs, EA’s, tax and business advisors learn about reasonable compensation in college and continuing education. Not so for business owners. Most business owners have only heard about reasonable compensation from one person – you. Are you explaining it so they “get it” as well as you do? (more…)
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Anatomy of an IRS Reasonable Compensation Challenge
- June 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Jack Salewski, CPA, CGMA & Michael E. Breslin CPA, MST, JD
What does an IRS reasonable compensation challenge look like from A-Z? Following is an analysis of a recent reasonable compensation challenge for a real estate agent in the Northeast handled by tax attorney Mike Breslin:
An S Corp owner has a fantastic year. More zeros than he’s ever seen. Then comes “The Letter” from the IRS.
That’s what happened to tax attorney Mike Breslin’s client. A real estate agent had a banner year, primarily because of one huge sale, more than doubling his usual income. But, like every other year in his career, he claimed no reasonable compensation on his S Corp tax return. (more…)
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Reasonable Compensation & the PPP
- May 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Beanna J. Whitlock, EA CSA
Executive Director ncpeFellowship, an internet organization for tax professionals who are serious about the business of tax – https://ncpefellowship.com/What a relief it was to hear these magic words: “My S Corp pays me as an employee based on the services I provide to the company.” Whew!
Why? Because the Paycheck Protection Program (PPP) offers loans for payroll. So when we helped these S Corp. clients apply for PPP loans, we felt confident they were compliant with the SBA guidelines and were eligible for help. What a relief it was when their loans were approved!
But not all S Corps got it right. In spite of years of informing, cajoling and even threatening, some of our clients have continued to refuse to pay reasonable compensation. Instead the shareholder/employee continued to take compensation as loan repayments, rents and distributions.
Then the world changed: COVID-19 (more…)
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Reasonable Compensation & the Single Shareholder S Corp
- April 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Jack Salewski, CPA, CGMA & Paul S. Hamann
“If there is only one shareholder and no other employees, should all distributions be taken out as Reasonable Compensation?”
This is a common question we receive at RCReports and like with most of the questions we receive, the answer is: “Maybe.” (more…)
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