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

In the past, the IRS generally challenged Reasonable Compensation for being too low (for S Corps). That will not be the case in the future, with the passage of the TCJA, making it critical to properly dial in your client’s reasonable compensation figure. Surviving a challenge requires credible backup data to defend your figure.

1099 or W-2 for Shareholder-Employees of S Corps? Updated for 199A

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

1099 or W-2? That’s the number one question Jack receives here at RCReports.

Answer: W-2

We hear your argument: Paying wages via 1099-MISC instead of W-2 has no tax effect!

Here’s Jack’s reply: It’s the law.

How to Stress Test a Reasonable Compensation Figure

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

Stress testing a reasonable compensation figure is simple. The courts have listed the factors they consider when determining whether a reasonable compensation figure is indeed reasonable. We can use those factors to “stress test” any reasonable compensation figure..

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

Without an accurate Reasonable Compensation figure the rest of tax planning is just a guess.

  1. Provide an accurate independent Reasonable Compensation Report to each shareholder-employee
  • Research and documentation is now a “must have” with the passage of the TCJA

What Approach Should I Use to Determine Reasonable Compensation

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.

Profit v. Distribution and its effect on Reasonable Compensation

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

How does profitability factor into a Reasonable Compensation calculation?  This is one of the most frequent questions we receive.  The short answer is: “Very little.”

That being said profit now plays a role on the shareholders 1040 with the passage of the TCJA.  How section 199A and the QBI affects your clients 1040 will vary significantly, because, as has been pointed out many times since the passage of the TCJA, section 199A is incredibly complex and the IRS has just released guidance on the issue.  Stayed tuned for more on the QBI in upcoming articles.

The Ego Factor and Reasonable Compensation

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

There are times when every small business owner’s ego can be an asset, although when it comes to Reasonable Compensation and S Corps, having a big ego could cost your client thousands of additional dollars in payroll taxes and QBI deductions.

Reasonable Compensation: The X Factor in the QBI

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

If you’ve sat down with pencil and paper or an Excel spreadsheet and attempted to map out what Section 199A deduction for Qualified Business Income (QBI) means to your pass-through business clients, then you’ve likely encountered circular logic, or with Excel – the circular reference error. And if you’ve been paying attention, even a little bit, to the conversations regarding Section 199A, then you have heard (over and over again) that this section of the Tax Cut and Jobs Act (TCJA) is arguably one of the most, if not the most challenging provision. 

Reasonable Compensation and the Modern Accounting Practice

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

As we approach planning season, and you take stock of your practice, begin thinking about the clients who are fun to work with, have unique needs or complex situations, and you almost always find yourself thinking about small and medium businesses (SMB) and their owners.  A demanding bunch for the most part, as they should be.  They have engaged you to look out for their best interests, to point out tax and business strategies that will continue to help their business prosper; you are, after all, their trusted advisor.

Reasonable Compensation Past, Present & Future

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

It doesn’t seem that long ago that the best advice for determining reasonable compensation was a rule of thumb or safe harbor figure; boy, have things changed. Beginning in 2005 the IRS launched a study of S Corp compliance. Since launching this study the IRS has

Three steps to Reasonable Compensation compliance for all of your S Corps

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 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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