Here’s a quick stab.
Legally Beating the IRS is individual to each client but I can give you some ideas. Let’s start with the issue you are having with the IRS. Not too clear but your description sounds like the IRS wants to ignore your S status of your corporation? Let’s just assume that is the issue for this example. This happens a lot because the IRS wants to see S-Corps paying the owners “reasonable compensation”. There’s no definition of reasonable comp so when an S-Corp gets audited basically the owner is going to have issues. Like most of what I do, your current problems are history so I can help with them but really the question is how to prevent these issues in the future? Here are some things we look at for tax planning and a new client.
Is your entity the right entity? For example, if you are married a limited partnership with your spouse as the limited partner, assuming she doesn’t work in your business, will give you almost the same benefits as an S-Corp. It is also harder for the IRS to fight.
If S-Corp is the right entity the first thing you want to do is make sure you have a reason paying yourself the salary you get. Usually this means a compensation study. We have a person that does these pretty reasonable. Getting one every couple years can’t hurt.
Although there is no safe-harbor, many preparers think you want to have at least 40% of your profit as compensation to owners on the tax return for the corporation.
Talking about profit, reasonable compensation is not based on what a company makes but obviously if the company is making $60,000 it can not pay you $100,000. So one way to make reasonable comp more reasonable is to pay more other expenses. For example, if you have a home office paying rent on the home office will reduce your profit and make a lower compensation more reasonable.
Sometimes a C-Corporation is a better choice. This would be particularly true if you have a lot of medical or sometimes when your income including the business income is under $100,000.
Anyway as you can see there are a zillion ways to beat the IRS. If you’d be interested in a free consult I could get a better idea of what possibilities would work for you.
This blog is a collection of questions from clients and the answers. The goal of the blog is not to answer the questions you might have. Most times the answers are based on each client’s personal situation. Please do not rely on this information to make important financial and tax decisions. The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs. Advice regarding similar issues for you should be based on your personal situation.
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