The IRS may have something to say about how much you pay yourself (think W2 wages) from your S Corporation.  If your S Corporation nets $100,000, how much do you pay in W2 wages, leaving the rest to be taken as draws?  Hint:  It’s not zero, although that can be tempting because of the hefty FICA tax of 15.3% you’ll save on every draw you take rather than taken as a wage.  But.. there’s a thing called “reasonable compensation.

Reasonable Compensation is the salary or wage that you, a shareholder-employee of an S Corp, 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 that we 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:

1. The dollar amounts must be verifiable.
2. The taxpayer must be able to demonstrate the origin of the amount claimed.
3. The taxpayer must be able to show that he entered the amount in good faith.

At Finch CPA Firm, we have tools, available for you, that meet the above requirements and mitigate the risks associated with an IRS Reasonable Compensation challenge.  Please contact me if you would like to discuss this issue further and/or to have Finch CPA Firm complete a Reasonable Compensation analysis with your input.

A Reasonable Compensation analysis 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. A Reasonable Compensation challenge can be costly.  Typically, taxes, penalty, and interest are more than double the original tax that would have been owed – plus costs for amending returns (all totaled, usually in the tens of thousands of dollars).

Finch CPA Firm doesn’t like to dwell on the past. We work on the present and the future. Tax projections are key to helping business owners maximize available tax deductions and plan for April 15^th instead of being blind sided at the last minute.

Tax planning is one of our main focus points at Finch CPA Firm because it is easier to adjust your spending now than it is to change the past. Our clients receive 2 to 3 tax projections per year. Each time receiving updates on tax laws that apply to their business and important information as to whether they should, and where they should, spend money or refrain from spending.  Should you purchase new assets or payoff an existing loan? Do you know that one can help your tax situation and one can hurt?  Knowing the difference before you make the decision could be the difference between owing IRS $15,000 or them owing you $5,000. Most people would rather be on the receiving end but do not have a professional they can ask.

Practice Makes Perfect – AND Saves You Tax Dollars!

Sandra Finch recently announced that she is now one of just 800 U S tax professionals who has completed the American Institute for Certified Tax Coaches’ training program leading to the Certified Tax Coach^TM designation.

“Taxpayers who really want to beat the IRS can’t wait for their accountant to work magic with a stack of receipts on April 15,” says Sandra Finch. “They need a plan for taking advantage of every deduction, credit, loophole, and strategy allowed.”

Traditional tax professionals only work to “put numbers in squares.” They try to put the right numbers in the right boxes on the right forms. Our process is different. We don’t just help our clients record history. We help them write it, with advanced tax-planning concepts and strategies.

The Certified Tax Coach^TM program focuses on court-tested, IRS-approved strategies for minimizing Alternative Minimum Tax, maximizing deductions from real estate and passive activities, maximizing retirement savings, and similarly powerful strategies. As taxes rise to cover increased government spending, this sort of proactive planning will become even more important in the future.

To earn the designation, Sandra Finch completed a three-day intensive training program. She has also agreed to abide by the AICTC Code of Ethics and complete 24 hours of tax-planning continuing education each year.

More information is available online at https://www.finchcpafirm.com/tax-planning-services.htm.

Today is the first Tuesday of November 2019 and it’s time to vote.  One of the statewide items on the ballot is Proposition 4. This is an amendment to a current law from 1993.  This Proposition is worded on the ballot as: “The constitutional amendment prohibiting the imposition of an individual income tax, including a tax on an individual’s share of partnership and unincorporated association income.”

 Texas is one of only 7 states that does not currently levy a personal income tax.

For more information on this Proposition including its path to the ballot box, and commentary for and against the Proposition you can visit https://ballotpedia.org/Texas_Proposition_4,_Prohibit_State_Income_Tax_on_Individuals_Amendment_(2019) .