Stress testing S corporations for Reasonable Compensation

S corporations will be one of the major beneficiaries of the new tax law, the Tax Cuts and Jobs Act (“TCJA”), which added a new provision to the Internal Revenue Code. Owners of certain pass-through organizations can receive a 20% deduction on taxable income. But it’s not all good for S corporations who could face increased scrutiny from the IRS. Here’s why. Let’s start with the basics. Pass-Through entities are those businesses that do not pay corporate income tax and include Sole Proprietorships, Partnerships, Limited Liability Corporations (“LLC”) and S corporations. Profits of these entities are passed directly through the business to the owners and are taxed on the owners’ individual income tax returns. But owners of S corporations get compensated differently than the owners of other entities. S corporation owners receive W-2 compensation. The other owners have Earned Income from Self Employment. Increased Tax Exposure…

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