Key legal, tax and financial decisions should be acted on by the board of directors and documented in the minutes at least annually. Key decisions include: the issuance of stock to new or existing shareholders, the purchase of real property, the approval of a long-term lease, the authorization of a significant loan amount or substantial line of credit, the adoption of a retirement plan, health plan, etc. These, and other key decisions, should also be backed by the supporting documentation. Documentation of business decisions within your minutes helps to protect the limited liability of your business and insulate you from personal liability. If you fail to pay at least minimal attention to the formalities of having a separate business entity, you may lose the limited liability protection of your corporate status. A "paper trail" can be important if disputes arise. Minutes provide solid documentation in the event key decisions are questioned or reviewed later by the IRS, shareholders, creditors, or the courts. A minimum requirement under North Carolina law is that corporations must have an annual meeting of its stockholders, with the minutes documented to maintain a valid corporate status.
A continued "hot topic" for the IRS is whether owners in S corporations are receiving reasonable compensation for the services they are providing to the Company. Accordingly, all S corporation returns are processed by the same IRS service center so that specific items in the tax return can be analyzed such as officer compensation and shareholder distributions. There are no written guidelines as what constitutes reasonable compensation and until recently, a taxpayer had never lost a case where some amount of officer compensation was paid. One recommendation is to use industry guidelines as a basis for what may be considered reasonable compensation. Future legislation may mandate officer compensation or that all earnings of the S corporation are subject to FICA taxes. Other considerations should be taken into account when establishing officer compensation. One consideration is that Social Security retirement benefits are based on the average amount of your earnings taxed for Social Security purposes during your 35 highest-earning years. If you report earnings for less than 35 years, a ZERO will be averaged into the calculation. Likewise, retirement plan contributions are based on wages. Therefore, you should keep this in mind when weighing reductions in current taxes vs. future retirement benefits.
Health care and group term life insurance benefits MUST be included on Form W-2 for the shareholder/employee and must be part of a "plan" in order to avoid being subject to Social Security taxes and to be tax deductible by the Corporation. The corporation deducts the health care fringe benefits for shareholder/employee and includes the amount in the W-2. Even though the amount is included in the shareholder/employees gross income, it is fully deductible on page one of their individual return. If you are the only employee and pay your own health insurance, then the company must pay the premium or reimburse you for it. Immediate family members who are employees of the S corporation are deemed to be shareholders for the purpose of reporting health insurance in their W-2. If the amount is not included in the W-2, it is treated as a non-deductible expense for income tax purposes. Please review your situation to ensure you are complying with the laws. If you need any clarification, please feel free to contact us.
Greater than 2% shareholders are not allowed a deduction on page one of their 1040 return for health insurance acquired or paid for through their S Corporation when they are eligible to participate in a subsidized plan provided through their spouse's employer. For purposes of this rule, a subsidized plan is essentially any plan provided by the spouse's employer, regardless of the cost differential between the S Corporation's plan and the coverage available through the spouse. If you have any questions regarding this rule, please feel free to contact us.
Shareholders are not allowed a deduction for health insurance on page one of their individual income tax return, unless premiums have been paid by the corporation directly or reimbursed to the shareholder and such amount has been added to the shareholder/employee's W-2. Provisions under the Affordable Care Act (ACA) make this type of reimbursement of health insurance premiums subject to the Group Health Plan provisions required in the legislation. If the corporation is reimbursing or paying premiums in this manner for only one person you are deemed to be in compliance with the group plan rules under the regulations. However, if more than one person is being reimbursed or covered in this manner, you could be out of compliance with the Group Health plan provisions and subject to a penalty of $100 per day per employee. In order to avoid the penalty and still get the full tax deduction when more than one employee is involved the company needs to establish a true group plan for the shareholders and/or employees to participate in. Otherwise, the company should treat the reimbursement as taxable income to the employee and have them take the deduction on Schedule A of their individual return. These rules are complex and can subject you to significant penalties if you do not handle the reimbursement correctly.
If your Company has a HSA plan, contributions to an HSA account under a cafeteria plan on behalf of a 2% or greater shareholder are not eligible to be tax free contributions by the Company. The Company would need to report the amounts contributed as either shareholder distributions (as long as distributions remained pro-rata) or as additional compensation to the shareholder. The amount would be deducted by the shareholder, as if they had made the contribution personally, on their individual tax return.
It is very important that loans between the shareholders and the Company are evidenced by a written promissory note with terms and a stated interest rate. Without such documentation, the IRS has disallowed the use of such loans as basis for deducting losses. Please be sure to prepare notes for all new loans and old notes are cancelled when paid.