Our First Look features are a product summary based upon information submitted by the software developer. It is a cursory review of the product from the website and other sources—such as a demo or trial version—when available.
In addition, as time permits, we research the company’s background and examine issues like how long they have been offering the product, how well they support their software by reviewing user comments or blog postings whenever possible. In some cases, we also need to research the related process.
While I have written numerous First Look features for Insightful Accountant, this is the first time I have ever written one I felt needed to be posted on our sister site, Tax Practice News, too.
RCReports is not the typical software you might find listed in the reviews within the pages of Insightful Accountant. For one, while it doesn’t connect with any accounting software, many accountants, including our readers, may need a tool to calculate reasonable compensation for some of their clients’ closely held companies.
The same is true for tax practitioners on Tax Practice News. During my background research, one of the RCReports blog posts covered expanding your tax practice by offering reasonable compensation evaluation services.
Some of you reading this may wonder what we mean when we use the term reasonable compensation. You probably thought that whatever a business could afford to pay its owners or officers was reasonable.
We are talking about how the owners of an S Corp were or (is) compensated. Unfortunately, the reality is that many S Corp owners take distributions out of their business, but take little or no reasonable compensation (in compliance with IRS regulations).
Because S Corp owners should always be set up on regular payroll and paid reasonable compensation based upon a business analysis before they take any distributions, there must be a time-saving and proven way to perform the analysis and determine the reasonable compensation.
Then, they must document these factors in case the IRS decides to challenge the business’s tax liabilities and tax status.
That’s where RCReports comes in.
As accountants, tax advisors, compensation attorneys and forensic evaluators, determining reasonable compensation is only half the equation. Putting that compensation into context is the second half of the equation expected from such trusted advisors.
RCReports was built to provide these advisors with the tool they need to determine reasonable compensation for small- and medium- closely held business owners—from start-ups to those with $25 million adjusted gross profit and up to 250 employees.
The results are based on a proprietary blend of IRS criteria, court rulings, geographic data, and an exclusive wage database synthesized to accurately and objectively determine reasonable compensation for closely-held business owners.
RCReports provides instant and accurate insights into reasonable compensation for closely held businesses to ensure clients remain compliant, minimize risk and realize maximum payroll tax savings.
Evaluating Reasonable Compensation
RCReports allows you to choose the IRS-approved method you would like to use for your client to build their report. Then, depending on the selected method, you or your client, will input various information. RCReports then will pull wages from its proprietary database to calculate the reasonable compensation figure.
Once you have reviewed this figure, you can create a PDF report that can be shared with your client and included in your work papers in case of an audit.
The Cost Approach breaks the business owner’s duties into areas like company administration, accounting, finance, marketing, advertising, engineering, purchasing, etc. First, you will send your client an interview questionnaire where they will fill in all of their duties, along with their proficiency and the time spent on each.
Once completed, the software matches the client’s survey answers with industry wage data for each job function to calculate a reasonable compensation figure.
The Cost Approach generally works best for small businesses where the business owner wears many hats (holds multiple roles) in the business.
The Market Approach compares the business owner’s compensation to compensation within the same industry. The market approach focuses as much as possible on the owner’s business and the specific position being analyzed (often the CEO or GM who also owns the company).
The question to be answered is: How much compensation would be paid for this same position, held by a non-owner in an arms-length employment relationship, at a similar company?
To answer this, you will input information about the company and owner, and the RCReports software will provide a full reasonable compensation report.
The Market Approach generally works best for medium and large businesses where the business owner provides only one duty: business management.
The Income Approach seeks to determine whether a hypothetical investor would be satisfied with their return on investment when looking at the business’s financial performance in conjunction with the compensation level of the owner.
The Income Approach only can be correctly applied when the company’s Fair Market Value (FMV) is available for each year that compensation is examined.
The rationale behind the Independent Investor Test is that investors pay employees to work to increase the value of the assets entrusted to their management. A high rate of return indicates that the assets’ value increased and that the employee provided valuable services.
Thus, an employee’s salary is presumptively reasonable if investors obtain returns above what they should reasonably expect. The Income Approach generally works best when there is no comparability data available.
You will input company information to calculate a reasonable compensation figure using the Income Approach in RCReports and the software will create a report for you.
Entity Selection Planner
This RCReports tool allows you to input company information, as well as additional fees for serving S Corp clients (such as S Corp tax return, payroll services and other consulting fees) to show your clients how much money they will save over 10 years if they move to an S Corp.
Once the data has been input into the Entity Selection Planner, you will receive a full report detailing cost savings over 10 years.
You can easily download and share the Entity Selection Planner results with your clients.
Don’t let your clients with S Corporations risk being audited by the IRS for their owners not taking reasonable compensation and having the documentation to prove they did.
Furthermore, why try calculating reasonable compensation for your clients to meet IRS requirements without the tools to ensure it is done correctly?
With RCReports, you can calculate reasonable compensation in minutes, not days.
Plus, premium subscribers gain access to a library designed to engage and educate their clients on the importance of reasonable compensation and the process of making those calculations.
In addition, premium subscribers also are eligible for audit and litigation support.
So, contact RCReports today for the premier software for reasonable compensation for closely held businesses to ensure they remain compliant, minimize their risk and realize the maximum payroll tax savings possible.
This is an editorial feature, not sponsored content. The vendor subject of this First Look article has not paid Insightful Accountant, or the author, any form of remuneration to be included within this feature. This First Look article is provided solely for informational and educational purposes.
The publication of this First Look article, nor inclusion of any product within this feature, in no matter represents any form of endorsement by either the author or Insightful Accountant.
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