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How an S Corp can Lose Money and Still be Required to Pay Reasonable Compensation

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

This scenario is possible because Reasonable Compensation is not tied to Profit or Loss but to Distributions.   The IRS guidelines for Reasonable Compensation state: The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.  It does not mention profit or loss at all but instead talks about ‘amounts received’ by the shareholder.  Therefore it does not matter whether or not the company is making or losing money; what matters is whether or not the S Corp owner is taking money (or other items of value) out of the S Corp.

Profitability V. Distribution

By Paul S. Hamann & Jack Salewski, CPA

One of the most frequent questions we receive is how profitability factors into a Reasonable Compensation calculation.  Unfortunately, Reasonable Compensation has very little to do with the Profit or Loss of an S Corp, and everything to do with the S Corp’s Distributions.

Hey – I’m Worth More Than That!

By Paul S. Hamann & Jack Salewski, CPA

“Hey – I’m worth more than that “is a phrase S Corp and Small Business Owners express quite frequently after researching their Reasonable Compensation figure.  Why? – Because most S Corp and Small Business Owners don’t understand what Reasonable Compensation is.  They mistakenly equate Reasonable Compensation with their dedication and commitment to their business. 

Your Best Strategy for Surviving an IRS Reasonable Compensation Challenge

By Paul S. Hamann

There are two ways to survive an IRS Reasonable Compensation challenge.  The first is a proactive strategy, getting all your clients ducks in a row ahead of time so you are prepared if the Reasonable Compensation figure is challenged.   The second is a desperate last-minute struggle to defend a Reasonable Compensation figure that may not have any basis in reality.

Why there is no right answer for Reasonable Compensation – but there are wrong ones

By Paul S. Hamann

The wrong answer goes something like this:  I guessed; I split my distribution 50/50, or any other answer that involves a WAG.  In other words, any answer that does not have supporting information will probably have little creditability with the IRS.  So if there are wrong answers how come there aren’t right answers?  The easiest way to think about this puzzle is to stop thinking “I need a right answer” and start thinking “I need a credible answer.”

How Much am I worth? It depends who’s asking…

By Paul S. Hamann

What am I worth is an interesting question because it largely depends on who’s asking and why?  An insurance advisor is considering your future.  A headhunter is examining your track record and potential.  A mineralogist would be assessing the value of your trace elements (about $160 for the average person).  But what we are concerned with is if the IRS asks…

Short & Sweet this Month

By Paul S. Hamann

A big thank you to all of our users!  Thanks for making RCReports the go-to solution for CPA’s and Financial Advisors when Reasonable Compensation is on the line.  We know you are in the depths of tax season so we are keeping this month’s newsletter short – see below for the sweet.

The Year in Review & The Year Ahead

By Paul S. Hamann

The Year In Review: 2013 brought us some great insight into the field of Reasonable Compensation by way of the McAlary case.

Compensation Agreements – McAlary had a Compensation Agreement, but the courts didn’t buy it: “We are not persuaded that the remuneration agreement represents a sound measure of the value of the services that Mr. McAlary provided to petitioner during 2006. We cast a sceptical eye on the agreement inasmuch as Mr. McAlary sat on both sides of the table when the agreement was executed, occupying the positions of both employer and employee. The agreement clearly was not the product of an arms-length negotiation.”

Reasonable Compensation Winning and Losing Year-End Strategies

By Paul S. Hamann

It is important to talk with your S Corp clients now about their Reasonable Compensation.  Most S Corps, whose fiscal year matches the calendar year, must have their payroll completed before year-end.  Waiting until next year to address this issue with your clients could cost them big.

Why S Corp Owners Require a Custom Job Profile

By Paul S. Hamann

A small business owner I know jokes that his business card should read “President and Janitor” (and everything in between). So, when my friend tries to determine his reasonable compensation figure (at his accountant’s request), should he be compensated as President? Janitor? Or somewhere in between? Where in between?

Reasonable Compensation Then & Now

By Paul S. Hamann

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:

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