What's considered "reasonable" tho? Is there like a percentage of business income that's the standard? I've heard everything from 30% to 60% of profits should be salary.

There's no fixed percentage that's automatically considered "reasonable" - it depends on your industry, role, qualifications, and what similar positions would pay in your area. A good starting point is to research what someone would earn doing your job in your location if they weren't the owner. Sites like Bureau of Labor Statistics or industry salary surveys can help establish this baseline. Some tax professionals suggest that anything less than 40-50% of your business profits as salary might raise eyebrows, but it really depends on your specific situation.

I switched from TurboTax to H&R Block last yr for my s-corp and it was WAY better. TurboTax kept giving me errors about my 941 payments but H&R Block had a specific section for SMLLC S-corps. The questions were clearer and it properly showed how the salary and distributions flow between the 1120S and 1040.

That's really helpful advice about the approach. I'll definitely try framing it as helping them be compliant rather than accusing them of anything shady. Did you have to talk to your direct manager or did you go to HR/payroll directly?

I started with my direct manager who then connected me with our payroll person. In smaller companies, going directly to whoever handles payroll can be more efficient. The payroll person was actually relieved because she had inherited the system from someone else and wasn't sure if it was correct. She made the change starting with the next pay period.

Yeah, that's what makes this suspicious. POS systems and payroll software typically have separate classifications for tips vs. employer-provided benefits. Someone would have had to deliberately choose to classify these meal vouchers as tips. At my restaurant, our meal credits show up as "non-monetary compensation" on our pay stubs, definitely not as tips.

What about insurance? The rental companies always try to sell that additional coverage. Is that deductible as part of the rental expense if I use the actual expense method?

Yes, the additional insurance or coverage options you purchase from rental companies would be considered part of your actual rental expenses, so they would be deductible based on your business-use percentage for that specific rental period. Some business owners overlook this, but if you consistently purchase the additional coverage, it can add up to a significant deduction over the course of a year with weekly rentals. Just make sure the insurance expense is clearly itemized on your rental receipts so it's properly documented.

The luxury auto limits still apply to rentals but in a different way. Since you're deducting actual expenses rather than depreciation, you don't run into the same depreciation caps. However, the IRS can still question whether extravagant or luxury vehicle rentals are "ordinary and necessary" business expenses. In your case, since you mentioned you're renting basic economy cars, this shouldn't be an issue. The IRS is mainly concerned with preventing businesses from fully deducting high-end luxury vehicles. Using standard economy rentals for legitimate business purposes shouldn't trigger any special limitations beyond the normal business-use percentage rules.

Thanks for sharing those stats - that does make me feel better. Just curious, where did you find those numbers? And what would be considered other "major red flags" besides the consecutive losses?

I got those stats from the IRS Data Book which they publish annually. The latest numbers show small business audits have been declining due to IRS budget constraints, though that may change with recent funding increases. Major red flags beyond consecutive losses include unusually large deductions compared to income (especially home office, vehicle, travel, meals), round numbers that suggest estimation rather than actual record-keeping, substantial cash-based income, and claiming 100% business use for vehicles. Also, mathematical errors or inconsistencies between forms can trigger automated reviews that sometimes escalate to audits.

I was audited back in 2023 for my crafting business that had losses for 4 years. It was a correspondence audit (mail only). They asked for receipts for all my expenses and evidence it was a real business (website screenshots, business cards, show applications). It was stressful but I had good records and they accepted everything. Whole process took about 5 months.

Thanks for mentioning the limitation on switching methods. I didn't realize that if you start with actual expenses, you can't switch to standard mileage later for the same vehicle. Is the reverse also true? If I start with standard mileage, can I switch to actual expenses in later years?

Yes, you can switch from standard mileage to actual expenses in later years, but once you make that switch, you're locked into actual expenses for the remaining life of that vehicle for business use. This is why the first-year decision is so important. I generally recommend using standard mileage in the first year unless you have a very expensive vehicle with high depreciation and relatively low mileage. This keeps your options open. The IRS rules on this are strict, and they specifically don't allow going back to standard mileage after using actual expenses.

Exactly this. I've seen so many small S Corps get in trouble for this exact issue. The IRS loves to go after vehicle deductions because they're often abused. Another tip: if your business use percentage is very high (like 90%+), be prepared for extra scrutiny.