UHY LLP News Alert - S-corporations and owners� reasonable compensation

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S-corporations and owners' reasonable compensation

Recent court rulings have concluded that reasonable wages need to be paid to owners of S-corporations.

S-corporations are flow-through entities that do not pay federal corporate tax, instead the income/losses are passed through to the owners and they are taxed on the income/loss. The owners pay the tax on the S-corporation profits; therefore they are entitled to take tax-free distributions of the accumulated profits of the S-corporation. Unlike compensation drawn from the S-corporation, no FICA/Medicare is due to the IRS on these tax-free distributions. Due to the payroll tax savings it may be beneficial to minimize the shareholders wages and instead maximize distributions of earnings.

In the past, the IRS has successfully challenged and increased the amount of compensation that an S-corporation shareholder has received by reclassifying tax-free distributions to compensation. The IRS recently won another case increasing the amount of compensation for an S-corporations shareholder.

The IRS and the courts use the following factors in determining the amount of reasonable compensation:

Training and/or experience
Duties and responsibilities
Time and/or effort devoted to business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key employees
What comparable businesses pay for similar services
Compensation agreements
Use of formula to determine compensation

The determination of reasonable compensation has been a long standing compliance and audit issue for the IRS. Reasonable compensation needs to be paid to S-corporation owners, especially if the S-corporation has made tax-free distributions during the year.

For more information or questions on this topic, please contact your professional at UHY LLP in Farmington Hills (248) 355-1040 or Sterling Heights (586) 254-1040 or visit us on the Web at uhy-us.com.

Events Calendar

CORE Business Management Webinar Series

Start your week out right with an executive-level, 55-minute webinar. The CORE Business Management complimentary webinar series is packaged to provide busy executives with the understanding, business direction and recommended strategies to help address, achieve and maintain business profitability and viability. Each session will run from 8:05 AM-9:00 AM EST. The series targets strategy, tools and methodologies to achieve and sustain a viable business based on strengthening a company's processes leading to increase profitability, market share and operational control.

04/02 Grants, Credits & Other Revenue Enhancing Strategies

04/16 Reshoring/Backshoring: A Manufacturing Opportunity?

04/30 Developing & Implementing a Strategic Marketing Plan

05/14 Web, Mobile and Emerging Technologies

05/28 Retooling Your Economic Engine

06/11 Social Media as a Marketing Tool

CPE credit is offered.The CORE webinar series will be presented by Alan Lund, Consulting Principal. Alan has over 30 years of experience providing business process analysis and profit improvement services. To register please contact Alan Lund via email alund@uhy-us.com or phone 248-204-9447.

05/16 Non-Proft Executive Briefing

UHY LLP's Farmington Hills office

27725 Stansbury Blvd., Suite 100

Farmington Hills, MI 48334

Registration and breakfast will start at 7:30 AM. Program begins promptly at 8:00 AM and concludes at 11:30 AM. Topics including:

Saving time and money by integrating donor management and accounting systems
Gaining better insights by using easy and flexible reporting tools
Building stronger member and donor relationships

Admission is free and breakfast is included. To register, please contact Eric Younan via email eyounan@uhy-us.com or phone 248-204-9354.

05/22 Business Owners Symposium---SAVE THE DATE!

Registration to open in April. More information to follow.

06/02 17th Annual Dan McCarty Golf Classic---SAVE THE DATE!

Twin Lakes Golf and Swim Club

Registration starts at 7:00 AM * Shotgun start at 8:00 AM

Sponsorship opportunities available * Proceeds benefit Lupus Alliance of America * More information to come

Published by UHY LLP News.

Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of "UHY Advisors." UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY Advisors, Inc. and UHY LLP are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. "UHY" is the brand name for the UHY international network. Any services described herein are provided by UHY Advisors and/or UHY LLP (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.