The new IRS proposed regulations confirm that the S corporation treats as wages the reasonable compensation that it pays to its shareholder-employees.
That’s good, and it opens planning opportunities. Even better!
There had been some commentators who claimed that wages of an S corporation did not count for the Section 199A wage calculation or that it was necessary for the IRS to clarify in its regulations whether such wages were wages for the 199A calculation.
Now the tax code and the regulations are aligned with clarity as to the wages paid to the shareholder-employees.
And in the new proposed regulations, the IRS has issued a warning: fail to pay a reasonable wage and the IRS will deduct what it thinks is the reasonable wage from your Section 199A qualified business income—and, of course, that would create big trouble on the wages not paid.