“While the TIGTA report indicates that there may be little enforcement with regard to reasonable compensation being paid to S Corporation owners, this is an issue that’s important to the IRS and that tax practitioners believe is being addressed,” McGrory said, adding that in August 2020 the IRS began its newest Compliance Initiative Project (CIP) associated with the lack of officer’s compensation associated with S Corporations.
“I recommend to high-net-worth clients who own and work in their S corporations ... pay themselves a reasonable salary,” McGrory said.
McGrory cites the IRS fact sheet on wage compensation for S corporation officers that lists several factors considered by the courts in determining reasonable compensation: duties and responsibilities; time and effort devoted to the business; payments to non-shareholder employees; and what comparable businesses pay for similar services.
Corporations remain in the bull’s eye of tax proposals right now.
“With the new infrastructure plan, choice of entity is likely to become increasingly important, which could influence the focus on S corporations in the future,” Forster said.