Taking Tax Smart Corporate Minutes is WorthwhileJanuary 26, 2015
Keeping minutes is more than just a tedious obligation—good corporate minutes could save you time and stress when it comes to your tax responsibilities!
It may be mandatory by state law to conduct an annual corporate meeting and keep minutes of the proceedings, but it’s particularly important if you’re a medical practice that operates as a C corporation. Though taking minutes can easily be viewed as a burdensome task, minutes can be used to record the practice’s intentions for transactions that will have major tax significance.
Six tax matters to look out for
- Shareholder-employee compensation- Some of your practice’s operating profits can be earmarked for salary payments to shareholder-employees. If this is the case for your practice, it is beneficial to document the percentage of these profits in your corporate minutes. There could be an IRS challenge concerning how much of the profits can be dispensed to shareholder-employees as compensation and even more so if the amount of wages is considerable.
- Year-end bonuses for shareholder employees- Validating the total year-end bonuses given to shareholder-employees helps guard that these outlays will be respected as compensation payments. Compensation payments are deductible on the practice’s Form 1120, whereas shareholder dividends are subject to double taxation because they are not deductible by the corporation. You should indicate any amendments to a written year-end bonus plan in your minutes.
- A buy-sell agreement- Any adoption of, or amendment to a stock redemption or liquidation agreement (a buy/sell agreement between the practice and/or the shareholders) should be documented in the corporate minutes. The agreement should disclose the valuation method by which amounts paid for the stock of exiting shareholders is determined. A reasonable interest rate should be stated for deferred payments if payments are going to be paid in installments.
- Corporation to shareholder loans- The IRS can claim that disbursements to shareholders aren’t loans but were in fact concealed dividends if you do not have proper documentation amongst other things.
- Shareholder to corporation loans- The IRS could allege that purported shareholder loans to the practice were in reality masked contributions to the firm’s capital if you do not take sufficient minutes. Shareholders could have extra taxable income if this happens, as the amounts paid back by the corporation would then be treated as dividends to shareholders. The practice would also lose the chance to write off interest deductions on its tax return.
- Related party transactions- “Related party” transactions help get validation with good corporate minutes. If your practice is interested in, for example, leasing and residing in a shareholder-owned building, verify that the lease payments are regarded as deductible expenses on the corporate tax return. The IRS could view the payments as excessive, and if this happens, they could consider part of the payments double taxed dividends and/or additional shareholder compensation. This would mean the affected shareholders and the corporation would have to pay extra payroll taxes.
Contact us with any questions regarding corporate tax minutes and your specific situation. The more you document, the better place you will be in to stabilize your tax burden.