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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.

Reasonable Compensation Planning Season Part I: Profitable S & C Corps

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

Third quarter already – are you kidding me.  This year, like most, has zipped by.  Soon the last tax deadline will have come and gone, and “Planning Season” will start.  There are two groups of small business clients you should start checking in with as early in planning season as possible to discuss Reasonable Compensation.  They are:

Are you Still using a ‘Rule of Thumb’ to Calculate Reasonable Compensation?

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

If you answered yes, my next question is why?  I was at a neighborhood wine party last week and had a conversation with Justin (not really his name).  I met Justin last year at the same event – a nice young man and entrepreneur who was doing very well for himself.  I asked how his business was going this year and he told me even better than last.

The Unintended Consequences of Not Having Reasonable Compensation (Part II)

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

Calculating Reasonable Compensation for an S Corp; C Corp; Small or Closely-Held business owner is not just about making the IRS happy.  There are many unintended consequences of not having reasonable compensation. They can be broken down into current; long-term; valuation; entity choice; and preparer issues. In Part 1 we discussed the current and long-term issues. This month we take a look at valuation issues; entity choice; and the potential impact on the tax preparer.

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