How to track S-corp shareholder basis, calculate reasonable compensation, and document distributions without triggering audit flags.
Start with the shareholder's capital account balance at the beginning of the tax year. Include stock basis (original investment + capital contributions) and debt basis (loans from shareholder to the S-corp).
Increase basis by ordinary income, tax-exempt income, and excess depletion. Decrease basis by ordinary losses, nondeductible expenses, and distributions. Order matters — losses are limited to basis.
Determine what the S-corp officer/owner would earn for similar work in a comparable position. Factors: duties, time spent, skill level, local wages, and distributions vs. salary ratio.
Record the reasonable compensation analysis each year. Include comparable salary data, the shareholder's role and hours, and the reasoning for the chosen amount.
Compare total distributions to accumulated basis. Distributions in excess of basis trigger capital gains. Document the distribution policy and its relationship to compensation.
SOLO includes the templates, checklists, logs, and SOPs to execute this workflow consistently across every engagement.