Tax-effective annual meeting minutes

Often viewed as a necessary evil, your annual meeting can be an effective planning tool

One of the requirements for maintaining a corporation’s existence (and the liability protection that it affords) is that the shareholders and board of directors must meet at least annually.

Although most people view this requirement as a necessary evil, it doesn’t have to be a waste of time. For example, in addition to being a first step in making sure the corporation is respected as a separate legal entity, an annual meeting can be used as an important tool to support your company’s tax positions.

Aside from the election of officers and directors, other actions that should be considered at the annual meeting include the directors approving the accrual of any bonuses and retirement plan contributions and ratifying key actions taken by corporate officers during the year. The directors should also specifically approve any loans to shareholders to lessen the opportunity for the IRS to reclassify the loans as taxable dividends. In addition, if the corporation is accumulating a significant amount of earnings, the minutes of the meeting should generally spell out the reasons for the accumulation to help prevent an IRS attempt to assess the accumulated earnings tax.

Tax issues to consider

Here are some examples of situations where complete corporate minutes can help the client ensure that the desired tax results are achieved.

Compensation. A common IRS ploy is to attack the compensation of closely held C corporation shareholder/officers as unreasonable. A well drafted set of minutes that outlines the officers’ responsibilities, skills and experience levels can significantly reduce the risk of an IRS challenge. If the shareholder/employees are underpaid in the start-up years because of a lack of funds, it is also important to document this in the minutes.

Shareholder loans. Any time a corporation loans funds to a shareholder, there is a risk that the IRS will attempt to characterize all or part of the distribution as a taxable dividend. The primary documentation that a distribution is intended to be a loan rather than a dividend should be in the written loan documents, and both parties should follow through in observing the terms of the loan. However, it is also helpful if the corporate minutes document:

• the need for the borrowing (how the funds will be used);
• the corporate officers’ authorization of the loan; and
• a summary of the loan terms (interest rate, repayment schedule, loan rollover provisions, etc.).

Advances. If advances were made to shareholders during the year, it’s important to make sure a formal note is executed and adequate interest is paid on the note before the corporation’s year-end. If adequate interest will not be paid, be sure to detail in the minutes that any deemed payments resulting from the below-market loan are intended to be shareholder compensation. Otherwise, the IRS will likely call it a dividend.

Valuation. Some corporations’ buy-sell agreements call for an annual valuation overseen by the board of directors. The results of such annual valuations should be reflected in the corporate minutes.

Internal sales. Transactions intended to be taxable sales between the corporation and its shareholders are sometimes recharacterized by the IRS and the courts as tax-free contributions to capital under IRC § 351. Corporate minutes detailing the transaction are helpful in supporting a bona fide sale.

Company vehicles. One frequently contested issue regarding a shareholder/employees’ use of company-provided automobiles is the treatment of that use as compensation (which is deductible by the corporation) versus treatment as constructive dividends (which is not deductible by the corporation). Clearly documenting in the corporate minutes that the personal use of the company owner is intended to be part of the owner’s compensation may go a long way in ensuring the corporation will get to keep the deduction.

Timing of annual meeting

The annual meeting date is typically set by the bylaws as twelve months after the date the business was incorporated. However, if this date doesn’t fall sometime near the corporation’s year-end, it might be helpful to reset the meeting date. By moving the date to within one or two months before the corporation’s tax year-end, the meeting can be used as a tax planning session. The current year’s business operations can be reviewed, the corporation’s legal and tax advisors can meet together, and any tax planning needed before year-end (such as establishing a qualified plan, setting up fringe benefit programs, etc.) can be completed.

Conclusion

These are just a few examples of why well-documented annual meetings can be an important part of a corporation’s tax records.

When scheduled shortly before the corporation’s year-end, the annual meeting can be an opportune time for your accountant and attorney to plan together for the wrap up of the year. We would be happy to work with you in preparing for your company’s annual meeting and to help ensure that tax-effective minutes are prepared.

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