Before the end of the fiscal year (e.g., December 31 for calendar-year corporations), boards of directors of small corporations should meet to discuss a wide range topics that can affect taxes for 2000 and in years to come. Here are some topics to discuss at year-end board meetings:
Year-end bonuses. Authorize year-end bonuses or other profit-sharing arrangements for 2000. Caution: Accrual method taxpayers can deduct amounts accrued before year-end if they're paid by March 15, 2001 (the two-and-a-half month rule). However, bonuses to "related persons" are only deductible when actually paid. Related persons include more-than-50% owners of C corporations and S corporation owners (of any percentage). Thus, a bonus to an 10% S corporation owner is only deductible by an accrual basis S corporation when actually paid.
Retirement plans. If the corporation has not yet adopted a qualified retirement plan for 2000, there's still time to act. As long as the plan documents are signed by December 31, contributions can be made at any time up to the due date of the business's return, including extensions. So, for example, if a C corporation obtains a filing extension for its 2000 return to September 15, 2001, contributions to the plan can be made until that date. Idea: If the return is filed before September 15th (for example, on August 1, 2001), and seeks a refund, the corporation can fund the plan by September 15th using the tax refund it receives.
Charitable contributions. If a 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 2000 as long as they're paid by March 15, 2001.
Retention of earnings. Profitable corporations may wish to retain earnings rather than distributing them to owners in the form of additional compensation, dividends, or otherwise. 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 -- 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 as allowed under a 2000 revenue procedure. 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). See IRS Publication 538, Accounting Periods and Methods and instructions to Form 3115, Application for Change in Accounting Method, at http://www.irs.gov.
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 or to bring in additional owners (over the 75-shareholder limit). An S election for 2001 can be made at any time during 2000 and up through March 15, 2001. Similarly, a termination of an S election can specify a termination date (such as December 31, 2000). Board action is needed to make these changes.
BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row. @barbaraweltman