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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.

Reasonable Compensation and Multiple S Corps

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

There are numerous issues when a business owner is a shareholder in more than one S Corp. Does the shareholder have to complete a reasonable compensation assessment (RCA) for each corporation, or will one assessment do? Does each corporation need to pay wages? What happens if the owner is above the Social Security maximum?

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.

Profit v. Distribution and its effect on Reasonable Compensation Part II

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

Last month we walked through three basic examples of how distributions affect Reasonable Compensation.  If you missed it or need a refresher click on this link.  This month we will dive into two more complex examples: The first explores Reasonable Compensation and look back periods. The second explores how basis and loans affect Reasonable Compensation.

Profit v. Distribution and its effect on Reasonable Compensation Part I

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

How does profitability factor into a Reasonable Compensation calculation?  That is one of the most frequent questions we receive.  The short answer is: “Very little.”  To help you understand why, we’ll describe a few scenarios below and next month.  First, a few guidelines:

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.

Determining Reasonable Compensation using the Cost Approach

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

The old adage “Simple isn’t always easy” perfectly sums up the IRS and Court guidelines for determining Reasonable Compensation for an S Corp owner.  At first blush the IRS and court guidelines seem simple enough – but once you start to follow the roadmap the IRS and Courts have laid out – something that appears simple quickly turns into a challenge.  Let us explore step by step best practices for determining Reasonable Compensation for a shareholder-employee of an S Corp:

$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.

Top 10 Reasonable Compensation points to discuss with your Clients before December 31st

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

With tax planning in full swing, we have compiled a Top Ten To Do List.

1. Determine an Accurate Reasonable Compensation figure for Every Client. Without an accurate reasonable compensation figure, the rest of tax planning is just a guess. 

  • Research and documentation is the best practice. If you don’t have a simple, economical and efficient solution for determining your client’s Reasonable Compensation figure, check out RCReports – industry-leading software for determining Reasonable Compensation for Small Business Owners and shareholder-employees of S Corps. 

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

Planning Season is a good time to sit down with your profitable Schedule C, LLC’s & Partnerships to discuss the potential tax savings of changing to an S Corp.  Shareholder-employees of S Corps only pay employment taxes on their Reasonable Compensation versus Sole Proprietors, LLC’s and Partnerships that pay employment taxes on all profits.

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contact us directly on +1 (720)-279-8800 or Get Started now