HearthRC Defense intake: Other industries · working summary
The defense is the documentation, not the number.
A shareholder-employee performing more than minor services must be paid reasonable compensation before distributions (IRC §3121(d)(1); Rev. Rul. 74-44). When the salary is too low, the IRS can recharacterize distributions as wages and assess back payroll taxes. The controlling case, Watson v. United States (8th Cir. 2012), endorsed valuing the owner's services task by task, and IRS Fact Sheet FS-2008-25 lists the nine factors examiners weigh.
There is no safe harbor and no statutory percentage. What holds up is documentation: who does what, for how many hours, valued against the right labor markets. This intake gathers the facts that documentation is built from.
1.Entity and compliance baseline
The election, the ownership, and the pay pattern examiners look at first.
S election effective date
From Form 2553. Note any late-election relief in the notes below.
2015-01-01State of formation
IllinoisRegistrations and licensing
Any registration or licensing tied to the entity or its industry.
Specialty trade contractor registrations current in Illinois. No product licensing.
Ownership
All shareholders. Note anyone who does not materially participate.
| Shareholder | Ownership % | Materially participates? |
|---|---|---|
| Scott Stone | 100 | Yes |
W-2 wages vs distributions, last three years
| Tax year | Owner W-2 wages | Distributions |
|---|---|---|
| Two years back | $98,000 | $290,000 |
| Last year | $104,000 | $335,000 |
| Current year | $110,000 | $360,000 |
Payroll cadence
Lump-sum timing is factor 6 in FS-2008-25 and a common examination trigger.
Paid ratably through the yearDistributions proportionate to ownership?
Disproportionate distributions risk the single class of stock rule.
Yes, proportionateAnything else on the entity
Late-election relief, mid-year ownership changes, related entities.
Single shareholder since formation. No related entities.
3.Time and function allocation
The core of the analysis. Allocate the owner's hours across roles; each role benchmarks against its own labor market. If no time log exists, a representative two-week log is worth requesting.
Hours per week by role
Wage benchmarks shown are the Bureau of Labor Statistics occupation codes each role maps to.
| Role | Hrs / wk | Notes |
|---|---|---|
| Client or production work (the trade itself) | 6 | Site checks and estimating review |
| General management and operations | 14 | Crews, schedule, vendors |
| Sales and business development | 8 | Bids and key accounts |
| Administration and front office | 2 | |
| Bookkeeping and finance | 2 | Reviews the bookkeeper's close |
| HR, hiring, staff supervision | 3 | 25 to 75 field and office staff |
| Executive strategy, banking, planning | 5 | Banking, bonding, equipment plans |
Total hours per week (hrs)
40Weeks worked per year (weeks)
52Locations
Single office or location