Reasonable compensation is the wage an owner working in their own corporation is required to pay themselves before taking further money out as distributions.
Why the requirement exists
Wages carry payroll tax; distributions do not. Without a floor, an owner could pay themselves a nominal wage and take everything else as distribution, paying almost no payroll tax on work actually done.
What makes a figure reasonable
The test is what the business would have to pay someone else to do the same job: the duties performed, the hours, the experience required, and what comparable roles pay in the same trade and area.
An owner who runs the business full time and pays themselves a token wage does not meet it. An owner who is genuinely passive may reasonably take little or none.
Where it applies
The rule bites on corporations that pass profit through to their owners. A sole proprietor does not pay themselves a wage at all — they take an owner's draw, and the distinction does not arise.
Setting the figure is a decision for an accountant who knows the business. It is recorded in officers and owners.