Without an accurate Reasonable Compensation figure, tax planning is just a guess.
1. Educate. Send an issue letter so your clients are thinking about Reasonable Compensation before you meet.
Most S Corp owners, once they understand the issue, will follow your advice as their Trusted Advisor. For those who don’t, sharing the issue letter will document your attempt to do so.
Download Issue letter HERE
2. Stress Test. Is your client’s Compensation figure Reasonable?
If it fails the stress test, it likely won’t survive a Reasonable Compensation challenge.
Download Stress Test HERE
3. Research. Provide an accurate, independent Reasonable Compensation Report to each shareholder-employee.
Research and documentation is now a “must have” with the passage of the TCJA.
4. Get Up-to-Date. Put Section 199A & the QBI on the meeting agenda.
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A shareholder-employee’s compensation from an S corporation is often subject to IRS scrutiny because S corporation flow-through income enjoys an employment tax advantage over that of sole proprietorships, partnerships and LLCs. This advantage finds its genesis in Revenue Ruling 59-221, which held that a shareholder’s undistributed share of S corporation income is not treated as self-employment income. In contrast, earnings attributed to a sole proprietor, general partner or many LLC members are subject to self-employment taxes.
