Corporate minutes scam

Over the past few weeks, several businesses in Arkansas have received solicitations in the mail requesting that the business pay a service to keep them in compliance with an "Annual Minutes Requirement Statement".  On November 5, Attorney General Dustin McDaniel released on his website information regarding the solicitations, confirming that it was a scam.  After a simple Google search, this same scam appears to be present in several states around the country. Arkansas law does require corporations to maintain minutes of the meetings of owners and board of directors.  But, as noted in the Attorney General's release, these minutes are not required to be filed with the State.

Best practice is for owners and directors to meet at least annually in order to satisfy their obligations as those charged with governance of the entity.  Topics to cover at such meetings can include (but are not limited to):

• Elect corporate officers
• Review and analyze financial results
• Approve corporate borrowing or debt financing
• Approve incentive compensation plans
• Review employer-sponsored retirement plans and performance
• Retain independent auditors, and approve audit reports or tax returns prepared by external CPA's
• Discuss status of pending or threatened litigation

Minutes should be signed by the Secretary and Chairman and evidence all members present, and the original signed minutes should be stored in a safe place with other corporate records.

Minutes are required to be kept by all corporations, whether they are $1 billion businesses with 20 board members, or a small S-corporation with one shareholder.  In the event of an IRS exam, one of the items the IRS will most likely request to review is the company's meeting minutes for the year under exam.

A copy of the Attorney General's announcement can be found on his webpage here.

Bonus

One of the better moves made by Congress at the end of 2012 was to extend the 50% bonus depreciation allowance to 2013. This is a great resource for businesses, but is often confused with its less beneficial counterpart, the Section 179 depreciation allowance. Bonus depreciation allows a business to expense 50% of the original cost (depreciable basis) of a qualified asset in the year of acquisition. The taxpayer can then take normal depreciation on the remaining 50%, beginning in the first year. For example, if a business buys a $5,000 piece of equipment, they can expense $2,500 in the first year plus the normal depreciation on the remaining $2,500. This is why it's called "bonus" depreciation - because you get your normal depreciation, plus a "bonus" of 50%.

Bonus depreciation has benefits that make it more useful than Section 179 in some cases. There is no income limitation, which means a business is eligible to take advantage of bonus depreciation no matter their level of income (or even loss). As a matter of fact, bonus is considered to be automatic, and the taxpayer actually has to elect not to take it. Bonus is also elected by "class life" instead of by specific asset.

Bonus can be helpful because, unlike Section 179, it can be used to reduce taxable income below zero. Using bonus to create a loss can be an especially helpful planning tool for 2013. With the 50% special bonus depreciation allowance slated to go away in 2014, a taxpayer can take advantage of the special allowance in 2013 by making as many planned PP&E acquisitions as possible. By utilizing bonus depreciation, the taxpayer can push their company into a loss for 2013, and the net operating loss (NOL) can be carried forward to 2014 (and future years) and used to offset ordinary income.

In some cases, electing out of bonus is a better decision for a business. For businesses that do not turn over PPE very often and count on depreciation each year to keep their taxable income down, bonus might not be ideal. It will provide a 50% write-off in year one, but the depreciation expense in each subsequent year will be significantly lower. Also, some states (such as my state of Arkansas) do not conform to the same rules as the IRS, which can create a Federal to State difference in depreciation. Although this is not a reason in itself to elect out of bonus, it does require the taxpayer to keep a record of the Fed to State difference in future years.

Thanks to my colleague for suggesting this topic. Have something you want to hear about? Email me.

Simplify my home office

Beginning in tax year 2013 (returns which will be filed during 2014), the IRS is offering a simplified option for the Home Office Deduction.  If the space in your house that is used exclusively for business on a regular basis is <= 300 square feet, then long gone are the days of keeping track of your cleaning, insurance, utilities and other household expenses. In previous years, the benefit of the deduction usually did not outweigh the trouble for getting together the information needed to make the calculation, especially when you have a self-employed person using a very small part of their house as an office (< 10% of the home).  The calculation also confused taxpayers because some parts of the deduction, like mortgage interest and real estate taxes, were allocated between the Schedule A Itemized Deductions and the Form 8829 Expenses for Business Use of Your Home.  Then there is the added headache of depreciation, which potentially was recaptured if you later sold the residence that housed the home office (meaning it had to be added back when you sold the house).

The simplified option is as its name implies: simple.  Take the square footage of your home office (not to exceed 300 square feet), multiply by $5, and that's your deduction.  There is no depreciation allowed and no splitting of household costs - all of your mortgage interest and real estate taxes go to the Schedule A.  Some of the characteristics of the deduction will remain the same, such as the space in the home must be exclusively used for business and the deduction cannot exceed your income from the business activity, but overall this simplified method will be much easier for some taxpayers.

It is important to note that the regular (original) option is still available, and can be beneficial to taxpayers that use a significant portion of their home exclusively for business.  The benefits of the deduction will be different for a consultant that has a 150 square foot office in their 3,000 square foot home than for a landscaper that has a 1,000 square foot garage used as a shop in a 2,500 square foot home.  It would also be beneficial for the taxpayer to do a rough calculation to see if the $5 per square foot is consistent with what they would be getting under the regular method.