S Corp Compensation, Lost PPP Checks, New Rules for Business Meal Tax Deductions
Being an independent business owner of any kind comes with its fair share of opportunities and challenges.
But being an independent wealth management business owner takes it to a whole new level when it comes to expectations on dotting the I’s and crossing the T’s on everything – Including your taxes!
Each month, I leverage my 20 years of experience as a CPA that works with many entrepreneurial financial professionals to answer some of the thorniest tax questions from Wealth Solutions Report’s readers.
This week, I fielded three questions about, respectively, S Corp compensation, how to address IRS payroll penalties and what to consider regarding new rules for business meal tax deductions.
Question 1: My financial advisory business is set up as an S Corporation, where I’m the sole shareholder as well as an employee of the firm. Can I take cash distributions from the business and characterize them as shareholder draws, versus employee wages?
If so, are there particular times in the calendar year when it would be best for me to do so?
- Rick from Trenton, New Jersey
A: Always glad to answer questions from an advisor in NJ as I grew up right outside Trenton. S Corp shareholders who actively work in the business are considered employees, even in instances where the S Corp has just one shareholder.
Your S Corp must pay you reasonable compensation as wages for the services that you perform. As long as you have something to support the reasonable compensation you can take distributions in addition to your wages.
In order to determine what is reasonable find reliable statistics regarding the wages in your area. Once you find a salary or wage comparison in the statistics, make reasonable adjustments based on the difference between your business and the average business. Maybe you do not work full time, so you can adjust your compensation downward since you do not work full time.
You don’t want to ever be the winner of an IRS audit lottery because of S Corp cash distributions and wages. The IRS could go back over a number of years and reclass the distributions as wages. When that happens, the IRS reclassifies all payments made to you as wages and will hold the firm liable for employment taxes.
Question 2: My wealth management practice recently received an IRS late penalty notice for failing to deposit payroll taxes timely. Our office admin was out sick due to caring for a family member dealing with Covid-19 related issues and the payment was 1 day late. Is there any way to get out of this penalty?
- Allison from Birmingham, Alabama
A: The IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions.
The IRS permits reasonable cause penalty relief for penalties arising in three broad categories, Filing of Returns, Payment of Tax and Accuracy of Information.
Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.
Here are three instances where you might qualify for reasonable cause relief:
- Your or an immediate family member’s death or serious illness, or your unavoidable absence
- Inability to obtain necessary records to comply with your tax obligation
- Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance
Here are five instances where you likely do not qualify for reasonable cause penalty relief:
- You made a mistake
- You forgot
- You relied on another party to comply on your behalf.
- You do not have the money
- You are ignorant of the tax law.
It has been our experience with situations like yours a well written letter to the IRS and a follow-up phone call will get the penalty abated. It also helps to have a good payment history.
Question 3: Now that the pandemic is largely contained, I’m looking forward to doing more in-person business entertaining, including meals with clients and referral sources. Is it true that new rules allow for a 100% business meal deduction going forward?
- Dustin from San Francisco, California
A: Yes and no. Congress enacted a 100% business meal deduction in December 2020. However, it is a temporary deduction that applies only to calendar years 2021 and 2022.
Equally important, this 100% deduction applies to situations where a restaurant supplies the food and beverages.
To be clear, you don’t have to pay the money directly to the restaurant. For example, you qualify for the 100% deduction if order a restaurant meal that’s delivered by, say, Uber Eats or Grubhub.
But to qualify for the 100 percent deduction, you need a restaurant. The IRS recently provided definitions and examples of what is and is not a restaurant.
What doesn’t count as a restaurant according to IRS definitions and examples? Grocery stores, specialty food stores, liquor shops, pharmacies, convenience stores and, yes, vending machine kiosks.
So don’t count on the bag of Doritos that you bought at the 7-11 being 100% tax deductible!
Michael Cody, CPA, is Managing Partner of Lieb, Cody and Co., a tax advisory firm that serves clients across the country, including independent financial advisor business owners.
Founded 40 years ago and headquartered in Torrance, CA, the firm encompasses seven accounting professionals (both CPAs and Enrolled Agents).
Lieb, Cody and Co are a member of the American Institute of Certified Public Accountants (AICPA) and CALCPA Society.
If you have tax questions related to your independent financial practice – or tax questions that your clients have raised with you – send them to Michael Cody via ContributingEd@wealthsolutionsreport.com
All queries will be addressed as anonymous submissions.