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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.)

Using Corporate Minutes to Protect Against a Reasonable Compensation Challenge

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

We regularly emphasize how important it is to have your S Corp clients who perform services for their S Corp research and document their Reasonable Compensation as a strategy for warding off an IRS Reasonable Compensation challenge.

But what about protecting the shareholders who don’t perform services, especially if they’re listed as an officer of the corporation.

Why Add Reasonable Compensation to your Practice?

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

There are more answers than you think.  Certainly, you want to research and document your S Corp client’s reasonable compensation figure or help them choose the best entity for their situation.  But even more importantly – it builds a closer relationship with your client, enhancing your ability to become a trusted advisor, the person your clients turn to first – because you know them best.

By Richard Pasquantonio, CPA/CFF, CFE, CDFA (Guest Author)

S corporation (S Corp) taxation is a popular election for many business owners who originally decide to form an association (corporation) or limited liability company (LLC). Some major advantages of S corp status are:

  • a single layer of tax applied at the individual level also referred to as pass-through taxation and
  • tax-favorable characterization of income such as a portion of earnings protected from the brutal self-employment taxes.

The Modern Era of Reasonable Compensation

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

The modern era for Reasonable Compensation for S Corps started in 2005 with a study of S Corporation Reporting Compliance.  This study spawned numerous reports that changed and shaped the way IRS examiners address non-compliance on the issues of Reasonable Compensation.  This change can be seen in the differences between Pre-2005 court cases and Post-2005 court cases.

$5,000 Preparer Penalty

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

We thought it was a myth that a tax preparer would be assessed a penalty when their clients did not pay themselves Reasonable Compensation for the services they provided their S Corp.    Then a CPA from California sought us out to run Reasonable Compensation Reports for all his S Corp clients after he was hit with a $5,000 preparer penalty.  Surely the facts, in this case, must have been very egregious, we thought, but we were wrong.  This CPA had actually been working with his client for years to bring his compensation in line.  They were actually getting very close when the IRS challenged his client’s compensation figure and whacked him with the huge penalty.

Why there is no Safe Harbor for Reasonable Compensation Figures

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

Maybe instead of a ‘Safe Harbor,’ we should look for ‘Any Port in a Storm’.  The IRS and Court Guidelines for determining Reasonable Compensation for an S Corp are anything but smooth sailing.  We are often asked if there are any guarantees that the IRS will accept a Reasonable Compensation figure.  The short answer is NO.  Why?  Because calculating a Reasonable Compensation figure is not included in any of the thousands of pages of IRS Code or Regulations.  Therefore we are left to look at how the Tax Courts interpret Reasonable Compensation in S Corp cases.

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