WorldWide Drilling Resource

22 NOVEMBER 2016 WorldWide Drilling Resource ® Drilling Into Money Not Boring by Mark E. Battersby Compensating the Boss - with a Low Tax Bill S nce 2010, sma bus ness owners have seen a s gn f cant upt ck n reasonab e compensat on cha - enges, as the Interna Revenue Serv ce (IRS) has ncreas ng y tra ned ts tax exam ners to scrut n ze pay- ro tax ssues - among them reasonab e compensat on. After a , the payment of a sa ary n excess of what the IRS cons ders reasonab e or the payment of persona expenses by the bus ness can a resu t n so- ca ed “construct ve d v dends.” Wh e the m ted ab ty (LLC and LLP) ent t es are the bus ness ent ty most often se ected by new sma bus nesses, the S Corporat on rema ns the s ng e most popu ar ent ty, afford ng f ex b ty and some protect on from ab ty. Unfortunate y, when t comes to any ncorporated dr ng bus ness, the tax treatment of d v dends can be harsh: It s not deduct b e by a regu ar corporat on, but t s ncome to the shareho der/rec p ent. When t comes to S Corporat ons, the IRS has determ ned to the extent S Corporat on owners perform serv ces for the r bus ness, the bus ness s requ red by aw to pay the owner a reasonab e sa ary as compensat on for those serv ces. In add t on - and cruc a y - th s reasonab e sa ary s subject to se f-emp oyment tax. The IRS s goa was and s to prevent S Corporat on owners from exp o t ng a payro tax oopho e by requ r ng them to pay themse ves reasonab e compensat on for the r serv ces. As a resu t, the ma n focus of IRS exam nat on of the tax returns of most bus nesses over the past decade has focused on determ n ng whether the compensat on pa d to the owner was “reasonab e” based on the serv ces prov ded. Determ n ng “reasonab e” has been made more d ff cu t because ne ther the IRS nor our awmakers have prov ded adequate spec f c gu dance. Obv ous y, dr ng bus ness owners must pay themse ves, but how much? Among the factors the IRS and courts w we gh nc ude compensat on of nonowner emp oyees, past sa ary h story, ndustry formu as, and the f nanc a cond t on of the bus ness. However, even though a these factors are cons dered, the most heav y we ghted cons derat on appears to be summar zed as the rep acement cost to the bus ness shou d t h re an outs de party to per- form the bus ness owner s dut es. To avo d the potent a p tfa s of the reasonab e compensat on ru es or face the expens ve prob em of accumu ated earn ngs, ear y p ann ng s essent a . Seek ng profess ona gu dance for reap ng those tax breaks due you, can ensure you, the owner/em- p oyee of your dr ng bus ness, don t run afou of the tax aws n th s area. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com ! " # !