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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

 

This month we welcome guest contributor – Ms. Beanna Whitlock, EA, CSA, Director of the ncpeFellowship.  Ms. Whitlock is an accomplished, Educator, Tax Professional, and author, with articles appearing in Time, Newsweek and the Wall Street Journal to mention just a few.  This month Beanna shares a Reasonable Compensation court case that takes an unexpected turn at the end (for Beanna at least).

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.

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.

Three Methods of Determining Reasonable Compensation Part III: The Income Approach

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

There are three generally accepted methods for determining Reasonable Compensation for the owner of a closely-held business. It is important to match each method with the business's size and business owner’s job duties. 

  1. The Cost approach, aka many hats, approach: Generally works best for small businesses where the owner wears multiple hats.
  2. The Market approach, aka the industry comparison approach: Generally works best for Closely-held SMB’s where the owner performs predominantly managerial tasks.
  3. The Income approach, aka the independent investors' test: Generally works best for outliers.

 

Three Methods of Determining Reasonable Compensation Part II: The Market Approach

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

There are three generally accepted methods for determining Reasonable Compensation for the owner of a closely-held business. It is important to match each method with the business's size and business owner’s job duties.

  1. The Cost approach, aka many hats, approach: Generally works best for small businesses where the owner wears multiple hats.
  2. The Market approach, aka the industry comparison approach: Generally works best for Closely-held SMB’s where the owner performs predominantly managerial tasks.
  3. The Income approach, aka the independent investors' test: Generally works best for outliers.

 

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