Can anyone help with a formula or direct me to a link where I can find a template for a reasonable compensation analysis? I was referred to RC Reports, but they only work on a subscription basis which is costly. I've read some articles that use a 60/40 ratio between compensation and distributions as a rule of thumb (not a rule of law). When I do that with my client, I think I can get close, but I'd rather have better documentation and logic behind the figure.
I also have a question about whether or not it would be an acceptable argument to include the spouse's wages in the overall calculation. This client is a single shareholder S corp, the spouse is an officer but not a shaeholder, Hawaii is not a community property state. Based on the 60/40 formula he needs to have about $215,000 in reasonable compensation. With regular wages, S-corp medical, a bonus check and a SEP contribution, he'll be at about $160,000, the wife will have $60,0000 to $65,0000 on her W-2 and a SEP contribution. Together they would exceed the formula for required compensation, and certainly the shareholder benefits from the wages paid to his wife. Would IRS feel the same?
An alternative I'm considering is to recommend offsetting some of the distributions taken as payroll to reduce the amount required to satisfy RC rules. This is a work in progress, so I'm open to suggestion. I don't usually have to worry about RC with my S corps, but this client, this year has a VERY different income situation and has had a very successful year which is throwing everything into a tizzy.