Tax Matters to Discuss in Your Year-End Meeting
By Barbara Weltman
Corporations are required to have an annual meeting, and most small companies schedule it near the end of the year. Other types of businesses may not be required to hold an annual meeting, but they are well advised to do so. The reason: There are many important tax matters to settle before the end of the year, and an annual meeting may also help businesses to plan for the coming year.
Businesses aren't static, and changes in operations, size, and other factors may benefit from new choices in the type of entity and other matters.
- Changing entity. If a sole proprietorship has grown, maybe it's time to incorporate or form a limited liability company (LLC). An existing C corporation may want to become an S corporation, or vice versa. Planning in the year-end meeting can enable a new entity to start in the New Year.
- Accounting methods. Tax law dictates some accounting methods that must be used, but there is also room for choice in some areas. Making changes can have long-term consequences and may also trigger income, so a discussion at a year-end meeting is advisable.
- Declaring dividends. Profitable corporations may want to distribute earnings to shareholders. While dividends are not deductible, shareholders who receive them pay tax on them at favorable capital gain rates (zero, 15%, or 20%, depending on the individual's tax bracket).
- Issues for going multi-state and international. A business may begin to sell across borders into other states and/or other countries. This raises a host of issues, including taxation, international intellectual property protection, and personnel. Deliberate actions may optimize business results.
Compensation and Bonuses
Year-end is typically the time when companies decide whether to give year-end bonuses, to whom, and how much, as well as to plan for the future. Some considerations:
- Bonuses for 2016. If the business is on an accrual basis, bonuses declared now are deductible in 2016 as long as they are paid within two-and-a-half months after the close of the year. However, bonuses to S corporation owner-employees and to more-than-50% C corporation owner-employees aren't deductible until actually paid.
- Compensation for 2017. A year-end meeting is an ideal time to fix compensation for the coming year. In setting compensation, factor in employment taxes and the cost of employee benefits (e.g., company retirement plan contributions pegged to compensation).
- Deferred compensation plans. Owners and top employees may prefer to defer the receipt of year-end bonuses or other compensation until a later time, such as retirement. In order to avoid current income tax on the deferred compensation, payment must be made pursuant to a restrictive plan. Again, deciding this in a year-end meeting is wise for the business and those wanting deferral.
There are various employee benefit plans that businesses can consider for their staff. Some plans by their nature are limited to corporations (e.g., ESOPs, stock option plans). Others may be impractical for small businesses where nondiscrimination rules would effectively bar owners from enjoying any benefits. Routinely, many small businesses offer health insurance and retirement plans, paying some or all of the cost. But here are some plans to consider:
- Accountable plans. Reimbursement arrangements for employee travel and entertainment costs. This arrangement does not cost the company anything and saves on employment taxes that would otherwise apply to these reimbursements.
- Adoption assistance. The dollar limit for company payments for 2017 is capped at $13,570.
- Cafeteria plan. This is an arrangement that lets employees choose from a menu of benefits, based on company contributions on their behalf.
- Dependent care assistance. The dollar limit for company payments for 2017 is capped at $5,000.
- Education assistance. The dollar limit for non-job-related education is $5,250, but there's no limit on education assistance that's job-related.
Make sure you understand your state-law requirements for annual meetings by discussing them with your attorney. Also, talk about other legal matters with your attorney that should be addressed at the meeting, such as acquiring the assets or stock of another business, assigning or terminating a lease, or seeking financing from outside parties. Then review these matters with your accountant to make sure you understand the tax ramifications of the actions taken in a year-end meeting.