Reasonable Compensation 2%+ S Corp Owner

[S&D Associates]

I would like to know what would be considered Reasonable Compensation, before any distributions, if net income is about $100K? This is for a Tax preparer. If possible, please be precise. I am aware of IRS regs, but would like to get an opinion from others.

[MDEA]

Reasonable compensation

I would think $52,000 would be ok.

[Jiggers]

What this S-Corp converted from a Schedule C Sole Proprietor? And what was the net income in that business?

How much capital contribution was made by the shareholder to the S-Corp?

[Lion]

Does he have employees? How much does he pay them? Did he ever work for someone else as an employee? How much did he get paid? How much would he pay someone he hires to do what he does? Does he do all the tax preparation himself? Get a survey from a trade organization re what tax preparers in his area earn. Does the corporation have a retirement plan?

[TaxGuyBill]

I think Jiggers and Lion hit on the key points.

In my opinion, a service-only business with no employees and minimal capital should allocate almost all profit as Reasonable Compensation.

The more you add non-services, employees (or contractors) and/or capital, the more you may be able to reduce Reasonable Compensation and allocate more to Distributions.

Again, that is just my personal opinion, and I'm sure that some will disagree with me.

[Jiggers]

If a large amount was contributed as capital, a prudent investor would be looking for reasonal returns on the investment, not salary. Similar to investing in stock.

I have heard this discussed at S-Corp seminars in the past. If the investment was minimal, then there is little to be expected for the return on the investment.

And I agree that if all of the income is due to personal services, and he is the only employ, or the major employee, then a low salary is going to be hard to justify.

Going with a law salary is like putting "AUDIT ME" on the cover of the return.

[S&D Associates]

Reasonable Compensation 2%+ S Corp Owner

What this S-Corp converted from a Schedule C Sole Proprietor? And what was the net income in that business?

How much capital contribution was made by the shareholder to the S-Corp?

It's converting from a Sole Proprietorship. The net income was about 80K. At this point none.

[S&D Associates]

Jiggers

What this S-Corp converted from a Schedule C Sole Proprietor? And what was the net income in that business?

How much capital contribution was made by the shareholder to the S-Corp?

It's converting from a Sole Proprietorship. The net income was about 80K. At this point none.


Edit / Delete Edit Post Reply With Quote Reply With Quote Multi-Quote This Message