For small businesses formed as an S Corporation and with plenty of profits, reasonable compensation is a term you may want to be familiar with.
Many small businesses have organized as an S Corporation form of entity. In many cases, the S Corp election allows a business owner to save money on self-employment taxes, especially if they are operating as a sole proprietor. S Corp profits, or distributions, are not subject to payroll taxes.
If you are a business owner taking a salary and contributing substantially to the operations of the business, you may think that you should just take the distributions and forget the salary. After all, think how much you would save in payroll taxes. But this has already been tried and shot down by the IRS in the courts.
And this is where the term reasonable compensation comes in.
The IRS requires that business owners that perform a substantial contribution to the business be paid a salary according to a number of factors. This is called reasonable compensation. You can’t pay yourself below market and take a large amount in distributions.
The IRS has issued a fact sheet that describes the guidelines that can be used to determine reasonable compensation. They include employee training, experience, duties, time spent, history of distributions, bonuses, and many other factors.
There are also reasonable compensation ramifications for C Corporations as well.
If reasonable compensation is an issue or concern for your business, check out this link to the IRS’ fact sheet: https://www.irs.gov/uac/wage-compensation-for-s-corporation-officers.
As always, please feel free to reach out and let us know how we can help.
The information presented is of a general nature and should not be acted upon without further details and/or professional guidance. For assistance in identifying and utilizing all the tax deductions to which you are entitled, please contact your CPA or tax preparer.
As business owners, we want to remain optimistic about our business’ future. But life can happen, and we need to be prepared.
A good business owner thinks about all the risks to their business and has a plan in place to reduce or eliminate them. In 2017, we have already seen floods in the Midwest and California, a healthy dose of tornadoes, and an ice storm earlier in the year. And those are just the weather disasters.
Are you ready?
In 2015, Nationwide ran a survey that revealed that three out of four small businesses do not have a disaster plan. The same survey noted that 52 percent of small business owners thought it would take three months to recover from a disaster.
The most common solution is to create two plans:
There’s a lot of help online to help you create your plan. A few of the major items that should be covered include:
Creating a disaster recovery plan can be the lowest priority item on your to-do list as a business owner – until it isn’t. If you have a lot to lose, then consider spending some time on a plan to give you peace of mind.
This is general information and should not be acted upon without first determining its application to your specific situation. Please contact your business advisor for additional details.
Complicated bartering may now take place through bartering clubs that give members credits for items or services they contribute. Members can then use the credits to pay for goods or services offered by other club members. This service offers a convenience to businesses, as it can be difficult to find the businesses that offer what you are looking for when searching on your own.
It’s important to note that there are income tax consequences to bartering. To be safe, view your trades as if cash changed hands, since the goods and services are valued for tax purposes at their fair market values and taxed accordingly.
Also, a bartering arrangement does not always result in a deduction immediately equal to the income you recognized. You might provide a service and recognize income immediately in exchange for some equipment you will end up depreciating over several years.
Please call us if you need more information about tracking bartering transactions in your business.
This is general information and should not be acted upon without first determining its application to your specific situation. Please contact your CPA or tax advisor for additional details.
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