September 25, 2023

Business Owners’ Salaries Under IRC Section 199A

Get spot on business valuation | GreeneValue.comLate last year, the federal government enacted the Tax Cuts & Jobs Act of 2017, which ushered in comprehensive changes to the nation’s tax code.

Among the changes brought in by the new law is code section 199A, which enables certain owners of pass-through entities an up to 20% deduction of their income and significant tax savings. The section is complex and many factors go into the formulas for determining this deduction.

For pass-thru entity owners, such as owners of S Corporations, their W-2 wages can be one factor for this deduction, and changing W-2 wages can maximize the section 199A deduction. Frequently, owners have estimated wages arbitrarily, with little empirical evidence to back up their decisions. This may be the time to look closely and properly and appropriately determine compensation.

Determining the reasonable compensation is a complex matter. The IRS has published guidance and the U.S. Tax Court has opined in numerous recent cases.

At Greene Valuation, we determine reasonable compensation for closely held business owners, whether in a standalone compensation report or a comprehensive business valuation. We use empirical data and apply multiple methods as averred by the Court and IRS.

Call us today and let’s get to work helping your client taking advantage of this new code section. Implementing this now can maximize the impact on 2018 taxable income.