Salary, basis, distributions: one decision in the S-Corp workspace

The three numbers every S-Corp advisor reasons about

For every S-Corp client, three numbers control most of the annual tax conversation:

1. The owner's W-2 salary — reasonable per IRC §162, defensible against the IRS, and the input that reduces ordinary income passing through K-1.
2. The shareholder's basis position — beginning + contributions + income − distributions − losses − non-deductibles, ordered per §1367. The floor for tax-free distributions and the ceiling for deductible losses.
3. Distributions to the shareholder — non-dividend cash that reduces basis on the way out. Up to basis, tax-free. Above basis, capital gain.

These aren't three separate problems. They're three faces of the same problem.

Why they're linked

Walk through a concrete chain: an owner-operator running an LLC taxed as an S-Corp. Annual revenue projected at $400,000, expenses $250,000 before owner comp. The owner takes $0 W-2 and wants to model a $120,000 distribution before year-end.

• Reasonable comp engine says the owner's defensible salary is $80,000 based on their role allocation and geo wage data.
• Setting salary to $80,000 reduces corp ordinary income from $150,000 to $70,000.
• $70,000 of income flows through K-1, lifting shareholder basis by $70,000 (assuming 100% ownership).
• Beginning basis was $5,000. Available basis for distributions: $5,000 + $70,000 = $75,000.
• $120,000 distribution leaves $45,000 in excess of basis — capital gain to the shareholder.

Change salary to $40,000 instead. Ordinary income flowing through becomes $110,000. Basis lifts to $115,000. The same $120,000 distribution now only triggers $5,000 of capital gain. The trade-off: lower W-2, higher payroll-tax savings, but a more aggressive RC position the IRS could challenge.

This is a single tax planning conversation. Three numbers, one decision. Made well, it shifts thousands of dollars in tax liability and clarifies what risks the client is choosing.

The "advisor's tab problem"

The way most CPAs and EAs solve this today: three different tools, three different timelines.

• RC software produces a salary number in February. It's a PDF.
• Basis spreadsheet gets updated at return time in April. It's a tab in someone's Excel.
• Distribution decisions get made in client meetings throughout the year. It's napkin math.

The three artifacts never come together. The advisor remembers the connections; the system doesn't. When the client asks "if I take $50k out next month, what's the tax hit?", the advisor has to manually re-derive basis from a stale spreadsheet, eyeball the salary number from the RC PDF, and add the numbers in their head. The answer takes ten minutes and is one stale assumption away from wrong.

Worse: the advisor has no way to compare scenarios side-by-side. What's the joint impact of bumping salary from $40k to $80k and pulling distributions forward? In three separate tools, the comparison is multiple spreadsheet copies, multiple PDFs, multiple meetings.

Modeling them together: one screen

A workspace that models the three numbers as one decision needs four surfaces:

1. Salary picker — the advisor can move the W-2 salary up or down, pulling from the RC engine's recommendation, the as-paid current salary, a custom override, or zero (status-quo modeling).
2. Forecast P&L — corporate revenue and expenses, with the salary picker feeding into officer comp automatically. Net ordinary income computes live.
3. Per-shareholder basis cascade — opens with the actual §1367 ledger, then layers the forecast K-1 share, the planned contributions, the planned distributions, to show the year-end position.
4. Cash bridge — current cash + projected operations − reserve target − planned distributions = available cash. Independent of basis. Both ceilings (cash + basis) get tested before a distribution is treated as safe.

Change the salary picker and every downstream surface recomputes. SafeRatio's workspace is built this way: one URL, four panes, one set of numbers.

What this means for client meetings

When the three numbers live in one workspace, the client meeting changes. The advisor opens one screen. The client asks a question. The advisor changes a number. The whole system recomputes. The conversation moves from "let me get back to you" to "here's what that costs."

Concrete things this enables:

• Real-time distribution planning. "Can I pull $80k for the down payment?" → instant answer including the capital-gain exposure if any.
• Salary scenario compare. Side-by-side: status-quo salary vs. RC-recommended salary vs. middle ground. The advisor sees the joint tax delta in dollars.
• Year-end optimization runs. Before December, the advisor models pulling distributions forward or back, takes the K-1 income hit, sees what suspended losses absorb, and lands on a plan with documented rationale.
• Multi-shareholder coordination. A pro-rata distribution that's safe for one shareholder might trigger gain for another. The workspace surfaces the binding constraint.

The IRS treats salary, basis, and distributions as connected. The advisor's tooling should too.

What's in the SafeRatio workspace today

The current build:

• Reasonable compensation engine — IRC §162-aligned, BLS wage data, multi-role allocations, 24-page audit-ready PDF.
• Per-shareholder basis ledger — event-sourced, §1367 cascade computed, Form 7203 import.
• Forecast P&L with monthly cells, Jan-current actuals lockable, May-Dec projections.
• QuickBooks P&L XLSX import — drop the file, the forecast populates with parsed lines.
• Basis modeling scenarios with side-by-side compare, snapshot persistence, and an Override modal that lets the advisor pick from the RC recommendation, the as-paid salary, a custom number, or zero.
• Cap-table management with 100% ownership enforcement.
• Cash bridge: cash on hand + projected operations − reserve target − planned distributions.
• Multi-advisor firm sharing — every advisor at the firm sees every client.

The workspace is live for advisors using SafeRatio with their S-Corp clients today. Pricing page has the details.