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Elvis tells the IRS “Don’t Be Cruel”

By Stephen Kirkland, CPA, CMC, CFC, CFF (Guest Author)

It has been more than 40 years since Elvis Presley faked his own death so that he could become a deserted-island based tax advisor. Back then, the IRS was auditing hundreds of C corporations, looking to see if they were over-compensating their shareholders. Elvis wanted to help.

Later, privately-owned C corporations started to become less common as more businesses elected S status. Elvis got all shook up to see the IRS begin to focus its sights on underpaid shareholder-employees at S corporations. He was on it like a hound dog.

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 Top Ten

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

Trying to get your S Corp clients to determine their reasonable compensation is a lot like trying to get a child to eat Brussels sprouts.  You can try to convince them that Brussels sprouts are good for you, while that pile of Brussels sprouts sits there just getting ever colder and even less appetizing.  But if you really want them to be eaten, you must put your foot down and require that the little green nemesis be eaten.

The Relationship Between Reasonable Compensation and Business Valuation

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

A common question in public practice is, “how much is my business worth?” This question comes up for a variety of reasons. It could be a business merger, sale of the business, divorce, death or even idle curiosity.

There are a lot of different factors that go into a business valuation. It is an oversimplification, but most businesses are valued as a multiplier of earnings before interest, taxes, depreciation, and amortization (EBITDA).

The Single Shareholder S Corp & Reasonable Compensation

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.”

If the business is so unique or the services of the shareholder are so unique, that no one could be hired to replace the owner and there are no other assets in the corporation, then everything taken out of the business should be treated as wages (Reasonable Compensation) and nothing should be considered a distribution.

1099 or W-2 for S Corp Director Fees?

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

What is the correct treatment of Director’s Fees? Is it a W-2 or a 1099? Let’s take an in-depth dive into this question.

If you were to look at the issue without a lot of critical thought you might conclude that the Director’s compensation should be reported on a W-2. Your reasoning would be this: In order for the compensation to be reported on a 1099 the Director would need to be independent of the corporation. How can a Director be truly independent of a business that they influence and guide?

Wiley L. Barron, CPA, LTD. v. Commissioner of Internal Revenue

by Beanna J. Whitlock, EA CSA (Guest Author)

T.C. Summary Opinion 2001-10 February 7, 2001

Having become very familiar with the court case, Wiley Barron became easy to talk about, particularly when it came to Sub-Chapter S Corporations and reasonable compensation.

Mr. Barron’s office was located in Pine Bluff, Arkansas. His S Corporation, of which he owned 100%, was formed in 1990 and as a Certified Public Accountant, he was in the business of providing accounting services. He is the only CPA of the S Corporation with two other employees who provide clerical and support services. Mr. Barron, as President, has sole authority over all the actions of the Corporation.

4 (free) Tools that make Reasonable Compensation Compliance a breeze

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

Watching the leaves in free fall inspired us at RCReports to put together four free resources for you. All of these tools (and more) are free for RCReports account holders. If Reasonable Compensation has been a tough subject to bring up with your clients, offering these free tools may help you rake in the data you need to get them IRS compliant.

1099 or W-2 for Shareholder-employees of S Corps?

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

1099 or W-2?  That’s the top 10 question Jack receives here at RCReports.

Answer: W-2

We hear your rebuttal:  Paying wages via 1099-MISC instead of W-2 has no tax effect!  True, if you’re considering only FICA taxes.  However, other government entities, both state and local, also want their slice of the pie. 

No Tax Court for Reasonable Compensation Re-Characterization

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

In a recent memorandum to its agents and examiners, the IRS lays out steps to keep Reasonable Compensation challenges out of Tax Court.  Great, you say, nobody wants to go to court!

Not so fast. The option of filing a petition in Tax Court provides taxpayers with time and leverage. By following the steps in this memo, IRS examiners can prevent taxpayers who cannot reach a resolution on a Reasonable Compensating from filing a petition in Tax Court.

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