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Corporate minutes offer peace of mind for tax purposes

And they may keep the IRS from poking its nose into the business.

January 10, 2014
| By Pat Evans |
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Thorough meeting minutes are a requirement for C corporations that want to avoid IRS scrutiny. Courtesy Thinkstock

Keeping well-documented meeting minutes is more important than one might think.

Although minutes are obviously important for company records, they might also serve a less well-known purpose: fewer hassles from the Internal Revenue Service.

Corporations are generally required to have at least one meeting a year — to determine and ensure status as a separate legal corporate entity — so minutes of the meeting should be well documented anyway, said Steven Struck, a certified public accountant with Baker Holtz in Grand Rapids.

“There are some legal issues that are in there that require a yearly meeting,” Struck said. “Minutes will help prove that you did.”

While many dread sitting through an annual meeting with seemingly endless jargon, it’s better than having to sit through a long and arduous meeting with the IRS. Come audit time, the minutes can support the decisions company leaders took on tax positions throughout the year.

For that reason, Struck and his colleagues at Baker Holtz request annual meeting minutes, but they also suggest inviting advisory teams and CPAs to the meeting to discuss and review taxable subjects. They also can prepare and review the minutes to be the most effective they can be when it comes to taxes.

“We request a copy of the corporate minutes and retain them,” Struck said. “We like to keep files of them on hand just so we can pull them out when we need to prove something.”

Struck provided several examples of when well-documented minutes could come in handy when the IRS comes knocking.

The IRS has the ability to attack closely held C-corporation shareholder compensation as excessive. The minutes should address the reasons behind the level of compensation, including the shareholder’s responsibilities and skills that give rise to such compensation.

“You should be able to say, ‘In our minutes, it shows why this is reasonable,’” Struck said. “Dividends can be double taxed, so you need to be able to justify the level of compensation if the IRS says it’s excessive.”

With respect to C corporations, if shareholders retain substantial funds inside the corporation, there may be a risk of the dreaded Accumulated Earnings Tax. The minutes should include specific reasons as to why there is a need to keep cash in the company. For example, cash may need to be retained for future expansion, capital expenditures or debt retirement.

Any time a corporation loans money to a shareholder, the minutes should reflect how the funds will be used, the officers’ authorization of the loan and a summary of loan terms. By adequately documenting this information in the minutes, Struck said, the risk of having the IRS characterize the loan to a dividend may be lessened.

The IRS can decide to go after a company for a variety of reasons, Struck said, so being able to defend any action taken is a key reason minutes are important.

“Say a corporation decides to not give out a dividend; the IRS can go after the company,” he said. “If it is discussed at the meeting — and it isn’t a reasonable thing to do — the minutes document why they chose not to distribute dividends: ‘Take a look at our minutes.’”

The minutes also can help when it comes to charitable deductions, Struck said.

During the meeting, even if it’s Dec. 31, a contribution approved by the board of directors can go toward that year’s charitable deductions, as long as it’s paid by March 15 the next year.

“If it’s in the minutes that they planned it before the year end, it’s good,” Struck said. “It’s nice to get some benefits from it, as well.”

Taking detailed minutes of annual meetings is important for several reasons, both to save money and to protect from the IRS sniffing around.

“The minutes just give peace of mind that you can defend different tax positions,” Struck said. “All you have to do is take a few additional steps to protect yourself.”

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