YEAR-END BUSINESS PLANNING
December 1, 2012
Every year, business owners dutifully engage in year-end planning; however, tax and law changes on the horizon may prompt new thoughts about your company's future. Here are some actions you may want to take at your formal or informal board meeting before the end of the year:
Year-end bonuses
Authorize year-end bonuses or other profit-sharing arrangements for 2012. Caution: Accrual-method taxpayers can deduct amounts accrued before year-end if they're paid by March 15, 2013. However, bonuses to "related persons" are only deductible when actually paid. Related persons include those who own more than 50% of a C corporation and any percentage of an S corporation owner. In light of tax increases for 2013 (e.g., the 0.9% additional Medicare tax on earnings), it may make sense to pay all bonuses before the end of the year.
Retirement plans
If the company has not yet adopted a qualified retirement plan for 2012, there's still time to act. Select a financial institution and sign documents by December 31 to adopt the plan. Then contributions can be made at any time up to the due date of the business's return, including extensions.
Charitable giving
If a profitable business wants to share the wealth with tax-exempt organizations, put it in the minutes. Accrual-method C corporations (but not S corporations) can deduct donations authorized in 2012 as long as they're paid by March 15, 2013.
Note: At the time of publication, the status of favorable tax rules for certain donations was not known.
Retain earnings
Profitable corporations may wish to retain earnings rather than distributing them to owners in the form of additional compensation, dividends, or otherwise. This enables you to finance new projects without the need for borrowing. But if accumulations exceed $250,000 ($150,000 for personal service corporations), a penalty tax applies unless there's a good reason for the accumulations. Put into the minutes the reasons for retaining earnings, such as for a planned expansion, to pay off an owner upon an anticipated retirement, or to reduce the corporation's debt in order to improve its balance sheet.
Change in accounting methods
Some changes may be warranted in how the corporation accounts for expenses and income. For example, small corporations maintaining inventory may wish to change from the accrual to the cash method. In general, changes in accounting method must be made during the year for which the change is effective (but some can be made with the filing of the tax return). Find more about changing accounting methods in IRS Publication 538, Accounting Periods and Methods, and instructions to Form 3115, Application for Change in Accounting Method.
Change of business organization
C corporations may wish to elect S status for the coming year, or S corporations may wish to terminate elections for a variety of reasons (e.g., to take advantage of certain fringe benefits, to bring in additional owners over the 100-shareholder limit, to become a "qualified small business corporation" that can offer investors tax-free returns, or to use equity crowd funding). An S election for 2012 can be made at any time during 2012 and up through March 15, 2013. Similarly, termination of an S election can specify a termination date (such as December 31, 2013). Board action is needed to make these changes.
S corporations may wish to terminate their elections so that they will be taxed as C corporations. Starting in 2013, this enables them to raise equity through crowdfunding from many small investors (remember S corporations have a 100-shareholder limit).
Salaries and fringe benefit plans for 2013
Put into the minutes what you've budgeted for 2013 for executive compensation. Also, add any notes about fringe benefit plans. If your corporation does not yet use an accountable plan to reimburse travel and other employee business expenses, consider doing so. This will save the company considerably on employment taxes because the reimbursements will be treated as tax-free. Learn more about accountable plans in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Final word
Holding your annual meeting (even if not required) and recording decisions is good business practice. It also helps to secure your personal liability protection. If you fail to hold your meeting, creditors may try to "pierce the corporate veil" and get at your personal assets. If you have any questions about the meeting, talk with your attorney. Also, talk with your CPA or other tax advisor to discuss your tax picture and what action you should take now.
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*SOURCE - Barbara Weltman - read more: http://www.barbaraweltman.com/articles/legal/legal_article_details.asp?id=207#ixzz2DoWej641
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