Corporations are required by state law to have an annual meeting, even if there’s only one shareholder. If you own a corporation (whether it’s a C or S), doing this chore each year ensures that you respect the corporate structure so as to help maintain your personal liability protection. At your annual meeting, review, propose and adopt a resolution for any major decision.
Here are some tax-related resolutions to consider.
1. Adopting an accountable plan. This is a reimbursement plan to cover employee expenses incurred on behalf of the corporation. If done right, the reimbursements are tax free to employees and not subject to employment taxes. Given the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor for 2018 through 2025 so that employees cannot personally deduct their business expenses, corporations should look into the rules for an accountable plan.
2. Adopting employee benefit plans. If you want to have a qualified retirement plan (e.g., 401(k) plan) or other benefit plans (e.g., adoption assistance, education assistance), adopt a resolution reflecting the decision.
3. Changing an accounting method. As a small business (no more than $25 million in average annual gross receipts in the 3 prior years), you can use the cash method of accounting. But if the corporation wants to change to the accrual method or make other major accounting method changes, it’s advisable to authorize them through a corporate resolution. This can include, for example, using the IRS de minimis rule for the purchase of items up to $2,500 per item or invoice instead of depreciating the cost. Small businesses must have this accounting procedure in place at the beginning of the year in order to elect this write-off method.
4. Setting compensation and bonuses. Compensation packages must be reasonable under the circumstances in order to be deductible. Large payments to owners may be considered reasonable in light of past underpayments or for other reasons. These reasons should be spelled out in a corporate resolution.
5. Declaring a dividend. The corporation must have sufficient earnings and profits (E&P) to pay out a dividend. Taxwise, the corporation cannot deduct the distribution; shareholders pay tax on the dividend at 0%, 15%, of 20%, depending on their overall taxable income.
6. Making or terminating an S election. The decision to become an S corporation or to terminate an existing S election requires a resolution. Given the changes by the Tax Cuts and Jobs Act, some corporations are considering termination of an S election to take advantage of the 21% flat tax rate on C corporations. The IRS has provided some guidance on the tax results when changes in accounting method are involved. Remember that if an S election is terminated, a new election cannot be made for 5 years.
7. Specifying the reasons for retaining earnings. C corporations cannot unreasonably accumulate their earnings (i.e., fail to distribute them) beyond $250,000 ($150,000 for personal service corporations, such as attorneys and accountants). Reasons for accumulating earnings beyond these limits should be spelled out in a corporate resolution (e.g., future plan to buy a building, buy out a retiring owner, expand to an additional location).
<https://smallbiztrends.com/wp-admin/admin.php?page=taqyeemstrong>8. Authorizing any transactions between the corporation and an owner. Any dealings between an owner and his or her corporation could be viewed as suspect. Therefore, the transactions should be detailed in a corporate resolution. These would include buying, selling, or leasing property and making interest-free loans from the corporation to the owner.
9. Buying or selling the corporation’s real estate. Because this is a major transaction, it should be noted in a corporate resolution. Be sure to factor in the tax cost of the transaction. For example, for S corporations, the sale of property may result in built-in gains, which are taxable to the corporation.
10. Taking a loan. Authorizing the corporation to take out a substantial loan or line of credit needs a resolution. Merely paying late on a credit card usually does not.
11. Planning to dissolve or liquidate the corporation. The board must vote to adopt a resolution to dissolve the corporation or liquidate any of its stock. If so, it must file IRS Form 966 within 30 days after the adoption of the resolution.
12. Signing the tax return. Any officer of the corporation can sign a tax return, provided he or she is authorized to do so. This grant of authority to sign the return should be done in a corporate resolution if it’s not in the bylaws. You don’t have to give the IRS proof of authority.
Don’t know how to write a corporate resolution? There are numerous templates you can easily find online. And consider working with your attorney to make sure you follow formalities to ensure your corporate resolutions are valid.
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It is that time of the year again. A time for these meetings. We must plan to get ready for what’s ahead.