in order to arrive at reasonable compensation for a single member Tax preparation S-Corp shareholder, would using the hourly salary of a hired tax preparer and a office manager be a reasonable formula? Any suggestions would be appreciated?
Reasonable compensation
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Reasonable comp is subjective and many people here have differing opinions. I try to look at what generates profits; two main ones being investment in equipment/inventory, and labor.
Generally, service businesses to not have a large investment in equipment or inventory, so little if any profits allocated to the effect these have on profits.
Next is labor. If the labor is supplied solely by the owner/shareholder, then the vast majority of profits should be allocated to reasonable comp. If labor is also provided by non-shareholder employees, then a portion of the profits generated by them cam reasonably bypass reasonable comp IMO.Comment
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Another agreement with Kathy.
In my opinion, if sole employee/shareholder does all of the work and has minimal financial investment, then almost 100% of the profit should be wages. The more that other people do the work and/or the employee/shareholder had large financial investments into the business, the more that can be allocated to non-wage distributions.Comment
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Another agreement with Kathy.
In my opinion, if sole employee/shareholder does all of the work and has minimal financial investment, then almost 100% of the profit should be wages. The more that other people do the work and/or the employee/shareholder had large financial investments into the business, the more that can be allocated to non-wage distributions.Comment
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I sort of disagree with that. We should think long and hard about doing the tax return if the shareholder/employee does not take a reasonable salary.
If we are convinced the shareholder/employee is misreporting salary versus distributions, I don't think we should be preparing that tax return. The §199A deduction shouldn't have anything to do with it. On the flip side, if you are okay with filing the tax return with the salary versus distributions, the §199A deduction should be used. I would think it would be unethical to not give the full §199A deduction we are okay with filing the rest of the tax return.Comment
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I sort of disagree with that. We should think long and hard about doing the tax return if the shareholder/employee does not take a reasonable salary.
If we are convinced the shareholder/employee is misreporting salary versus distributions, I don't think we should be preparing that tax return. The §199A deduction shouldn't have anything to do with it. On the flip side, if you are okay with filing the tax return with the salary versus distributions, the §199A deduction should be used. I would think it would be unethical to not give the full §199A deduction we are okay with filing the rest of the tax return.
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I guess I still disagree. If I'm willing to accept that a W-2 with $25,000 and a K-1 with $50,000 is accurate, I would view it as unethical to not give the full §199A deduction. If I was NOT willing to accept that a W-2 with $25,000 and a K-1 with $50,000 is accurate, I wouldn't do the return unless they were corrected.Comment
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