There are new risks related to your reasonable compensation figure’s accuracy. Reasonable compensation is the salary or wage that you, a shareholder-employee of an S-Corporation, must pay yourself for the work you perform for your company.
The Qualified Business Income (QBI) deduction (created with the passage of the TCJA) is tied to reasonable compensation and creates new risks (think tax, penalty and interest), if successfully challenged by the IRS.
Therefore, it is more important than ever to have credible documentation to back up your reasonable compensation figure. The IRS criteria and guidelines state that “companies have the burden of showing compensation is reasonable.” To accomplish this and to avoid the 20% accuracy penalty, the IRS states that:
- The dollar amounts must be verifiable.
- The taxpayer must be able to demonstrate the origin of the amount claimed.
- The taxpayer must be able to show that he entered the amount in good faith.
To support our clients, we have implemented a powerful reasonable compensation assessment tool that meets the above requirements and mitigates the risks associated with an IRS Reasonable Compensation challenge. It is an independent, unbiased report that establishes your reasonable compensation, using criteria outlined by the IRS and Courts, and provides a defensible position to an IRS challenge.
If you are currently on our Premium or Advantage Business Tax Package, there is no charge to have this Reasonable Compensation Assessment completed for you. If you are not on one of these packages, consider upgrading to take advantage of this along with other included benefits.
A Reasonable Compensation challenge by the IRS can be costly. Typically, taxes, penalties, and interest are more than double the original tax that would have been owed – plus costs for amending returns. In addition, the IRS is holding Tax Preparers responsible for unreasonable compensation, assessing preparer penalties of up to $5,000 for signing off on an unreasonably high/low compensation figure.
Although we do not require our clients to have a Reasonable Compensation Assessment completed by our firm, we encourage everyone to have support and sufficient reasonable wages.
