Reasonable comp services

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#21
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Just came across the Firm my client utilized for a reasonable comp report. They use RCReports and charged a whopping $175. To me, that means they're ONLY relying on the survey answers and the resulting report will not be evaluated with the shareholders. There is no way they would only be charging $175 if they actually spent time analyzing and updating to have a greater assurance the reasonable comp is...REASONABLE.
 

#22
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I ended up signing up today after a live demo.

I'm pretty impressed with their platform, and they have a nice discount running through the end of the month.

I agree with Cornerstone, to get maximum value of out of something like this, it's going to require a few hours of close and thoughtful interaction with the client. And, we should also take into consideration value billing.
 

#23
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I did a CPE course yesterday showing the most recent audit percentages by category. I was surprised to see that Total Positive Income of <$100k had highest audit rate next to large corporations. Perhaps this will actually prompt RC to be paid attention to by more S-Corp shareholders since it'll inevitably involve audits of both the 1040 and 1120S.

Still, I cannot imagine charging only $175 for an RC analysis even using RCReports. I suspect when I see the reports, it'll be "crap in = crap out" and no adjustments available without significant fees.
 

#24
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My question to those using RC Reports is are you utilizing this service to get the lowest possible acceptable salary or are you using it because you want to minimize risk to yourself?

We could all be using Cost Segregation Firms and R&D Tax Specialists to lower our clients taxes, but most make the assumption we do not need to take on that added risk. So very few use them. Maybe some of the big regional firms and national firms do use them all the time.

If I have a client that has a $5 million bottom line and I have them at a $500k salary? Is he going to be ticked at me because an RC Report might show his reasonable comp is $280k? I am costing him $2k plus in medicare each year.
 

#25
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Both, but at that level of wages it really doesn't matter much to anyone. The IRS isn't likely going to pursue $2k in additional Medicare taxes; it is simply cost prohibitive unless they find other issues to pile on top of it.

My focus is on clients that think they can pay themselves $24k/year and it needs to be $70-80k, or those that randomly choose $150k because it is what they were making elsewhere when RC could be $75-85k.

I have yet to come across a new S-Corp client where their wages were already in line with an RC analysis. They are either way too low or way too high. Once an RC analysis indicates at least SS wage limit, I basically stop concerning myself with whether it is reasonable or not and if the client wants to pay themselves more, so be it.
 

#26
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BerkshireCPA wrote:My question to those using RC Reports is are you utilizing this service to get the lowest possible acceptable salary or are you using it because you want to minimize risk to yourself?


Both. Outsourcing of risk, and because at this point I generally believe RC Reports is going to come in materially below a client's estimate if they just pulled offer data from Indeed.com. Most owners where many hats and spend a great deal of time doing low value work, but don't realize it.

Almost everyone I hear from involved with reasonable comp has conveyed this is now a strong IRS target. I believe they have the tools to find and flag associated 1120-S returns for reasonable comp audit. One thing is certain... Whatever your number is, it better be substantiated with thoughtful, reasonable and tactful documentation. RCReports is very professional and well reasoned documentation for the file.

BerkshireCPA wrote:If I have a client that has a $5 million bottom line and I have them at a $500k salary? Is he going to be ticked at me because an RC Report might show his reasonable comp is $280k? I am costing him $2k plus in medicare each year.


I don't think there's anything wrong with giving the client options. Either they can engage me to utilize RC Reports, or they can be responsible for determining reasonable comp and documenting their method for determining that reasonable comp. Just inform them in writing of the obligations and the risks.

I also don't think this there's anything wrong with opining on whether their figure looks high, low or about right from a 10,000 ft view and opining on the cost-benefit of an RC engagement.
 

#27
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ManVsTax wrote:
Almost everyone I hear from involved with reasonable comp has conveyed this is now a strong IRS target. I believe they have the tools to find and flag associated 1120-S returns for reasonable comp audit.


They do, same way they flag anything for audit. Every number on an individual return and Corp/S-Corp return with assets under $10 mil has a Discriminant Function (DIF) of a different value and weight. Another method is informants such as disgruntled shareholders, employees, spouses, etc. When combined, that DIF determines if a return is pushed for review by a human before a potential audit. RC is certainly one of those figures analyzed by the computer relative to total distributions reported on the K1 and net income. If no money was taken, there can be $0 RC since distributions were also zero.

"But I can't afford to pay myself a salary." IRS response: "But you can afford to take all of these distributions and run personal expenses through the business?" Let's get real people and follow the tax law, or don't do a friggin' S-Corp. I truly am tired of "tax pros" and lawyers that suggest an S-election entirely too prematurely and all they're doing is handing out incorrect information as to the "why."
 

#28
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Completed my first RC engagement earlier this week. Two man S Corp.

In a nutshell, this one engagement paid for the one-year subscription I paid, and RC came in materially below what the clients were expecting.

Clients are happy and I'm happy.

While I don't want to discuss specifics publicly, I'm happy to share details if you want to DM me.
 

#29
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I'm trying to understand exactly how valuable RC reports is.

Has anyone referred to it in an audit? Is there any reason to count on the IRS accepting it as authoritative?
Know your worth, then add tax!
 

#30
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I doubt the IRS would attack the compensation data on an RC Reports report. It's too well researched and documented using DoL data, geographical variances, etc. Even if they pour a ton of time into researching I doubt they get to a materially different answer vs RC Reports compensation data.

Rather I'd expect they might dispute the owner-employee's time spent rendering services or the the activity mix, which is determined outside of RC Reports and for which we generally rely on the client to self-report. There's no doubt the client is incentivized to report they spend more time on low value activities than high value, but if you do enough of these you know what activity mix is reasonable given the number of employees in the business.
 

#31
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Interesting. This definitely got me to consider it. I could totally see myself adding this to my value proposition.

I always base it on the distributions. Argument being that if the net income before officer payroll is 300k... then even if the average salary is $50k... the guy is obviously at the top of this field and would be making closer to 125k or 150k.

But clearly many people disagree with me. I need to reconsider this.
Know your worth, then add tax!
 

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