They seem unimportant and even a nuisance to keep track of, but come tax audit time, corporate minutes can save a business a lot of money in additional taxes and related expenses.
All corporations, regardless of how large or small, must keep corporate minutes. If your corporation doesn’t have minutes documenting key elements of transactions, the IRS will, in an audit, reinterpret the transactions in what may prove to be the most unfavorable way to your company. In the eyes of the tax code, the taxpayer is guilty until proven innocent.
When a corporation is audited without minutes, owners are just about guaranteed to suffer through audit time and related expenses, lost business expense deductions and additional income owners are responsible for paying taxes on.
Corporate minutes must be kept for everything, including the annual shareholders’ meeting and special board of directors’ or shareholders’ meetings to document what happens between annual meetings. Minutes also must be kept for key transactions, such as:
Corporate earnings accumulations. Penalties are due if a C corporation accumulates earnings beyond the reasonable needs of that business. Owners must document why certain profits were not distributed. The reasons should be as specific and detailed as possible.
Loans to employees and shareholders. When a company makes a loan to an employee or shareholder, this transaction must be documented, including a payback schedule and interest charges. If this isn’t done properly, the IRS will treat this as additional salary or dividends.
Salaries. Corporate minutes need to explain in detail why certain salaries were given and why they were considered reasonable. When the IRS sees a salary that it considers unreasonable, it will treat the salary as dividends.
Benefit plans. The board of directors must formally adopt pension plans and fringe benefits, and the corporate minutes must list the major provisions of these plans.
Buy-sell agreements. If corporate minutes show that valuation reports used for buy-sell agreements were adopted each year, the IRS is more likely to accept them. If the minutes don’t show this, however, the IRS will use its own valuation when determining gift and estate taxes.
Reasons for not keeping adequate corporate minutes are understandable. Owners of corporations tend to be very busy, and keeping detailed minutes is just one more item on an already too long to do list.
But good corporate minutes can end an audit very quickly. As a rule of thumb, no corporation should close its books on a tax year until the corporate minutes are completely finished and formally adopted. Louis P. Stanasolovich, named one of the best financial advisers in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills. Reach him at (412) 635-9210. The firm’s Web site is www.legend-financial.com.
