Reasonable Compensation
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Reasonable Compensation for all your S Corps in Three EZ Steps
- May 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
“The only reason for time is so that everything doesn’t happen at once.” Albert Einstein
Use the time to your advantage! Here’s how one RCReports subscriber brought every S Corp he worked with into Reasonable Compensation compliance in three easy steps. (Full disclosure: The steps below assume you have an RCReports account.)
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Are You Using the Right Approach to determine Reasonable Compensation?
- April 1, 2021
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Although there are general guidelines to help you pick the best approach to determine reasonable compensation, there are no hard and fast rules. For the overwhelming majority of your clients, one of two common approaches that rely on comparability data should do the trick. For the occasional client that just doesn’t seem to fit any molds, there is an approach for them, too.
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Rule of Thumb Used to Calculate Reasonable Compensation Shot Down in Court
- January 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Accountants are facts and figures folk. Accountants rely on data and analysis, not myths and tales.
Well, not always. In 2020 we asked 4,671 Tax Advisors if the IRS recognized Rules of Thumb such as a 50/50 split between distributions and reasonable compensation. Thirty-three percent said yes.
The IRS “Rule of Thumb” is a myth. But it’s a fact that we found 1,555 professional accountants who relied on this myth. (more…)
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10 Reasonable Comp Points to Cover with Your Clients this December
- December 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Without an accurate Reasonable Compensation figure, tax planning is just a guess. (more…)
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COVID Distribution Strategy for S Corps – Avoid a 15% Reasonable Compensation Penalty
- November 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
COVID has taught us a lot about protecting ourselves, and not just about wearing a mask. We’ve learned a lesson on how to use distributions to protect a company’s assets during any prolonged crisis.
Distributions are the expected reward for a well-run company. Plus, distributions protect funds from being at risk if the company gets involved in litigation. But the third reason for distributions you may have never considered is what CPA David Kolts dubs the 15% Reasonable Compensation Penalty. (Penalty here refers to consequence or disadvantage, not punishment.) (more…)
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Should you adjust Reasonable Compensation in the age of COVID?
- October 1, 2020
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
COVID is affecting everything in 2020, and that includes Reasonable Compensation. Business owners may be putting in more hours, or less, taking on new online tasks, or giving themselves a pay cut along with their employees. As businesses adapt to the pandemic, Reasonable Compensation calculations must be adjusted as well. “Set it and forget it” doesn’t work anymore in 2020.
What adjustments are warranted? There are three primary adjustments you should consider discussing with your S Corp. owners before the end of the year and a few others you should be aware of. (more…)
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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…)
