It Pays for Doctors to Keep Good Records

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]

More than a few medical professionals have ownership in small corporations outside of their medical practice, or day-job as physician-healers. More are contemplating same, as the healthcare insurance crisis grows, and the social and economic swagger of physicians decrease.

Small Corporations

But, some of these doctor-involved small corporations generally are not too formal in their day-to-day operations. Formality could even interfere with effective functioning of the emerging matrix business environment. On the other hand, doctors are notoriously stubborn, egotistical and business directors, officers and shareholders are usually the same few people. They are in contact daily. They might easily agree on a capital expenditure during a chance meeting in the stairwell, hospital, clinic, medical office or golf course,

Annual Meetings

But, if the formal procedures of large corporations seem out of place in the closely held corporation, holding an annual meeting and recording all matters in corporate minutes is not as pointless as it may appear.

Accurate and complete corporation minutes can produce real tax savings. The IRS keeps a sharp watch on closely held corporations. Corporate minutes can provide an excellent—and sometimes the only—defense against possible unfavorable tax consequences.

How Minutes Count

Corporations often enjoy a favorable tax rate compared to their owner’s personal rates. They also benefit from deductions and credits an individual or unincorporated business cannot get. But, to get all the tax benefits due you, you should make business decisions in a way that shows sound business purpose and intent. Your corporate minutes are proof of your good intentions should you ever be audited by the IRS.

Corporate Minutes

Corporate minutes have a particular format, just as the problem orientated medical record [POMR] that we are all familiar with, has its own style. For example, corporate minutes, along with receipts, invoices, and correspondence, serve as evidence in several important areas: 

Executive Compensation

Your minutes should show that any salary increase for an executive or officer has been formally approved and ratified by the board of directors. The basis for the raise should be noted in detail. Minutes should include relevant factors which can justify a raise such as: expanded job duties and/or time, contributions to company growth, and the need to match competitors’ salaries.

The minutes should also describe the scope of the job and what the increase will be. Such information is designed to satisfy the IRS and the courts that the compensation is reasonable and the increase is legitimate. With this information, the IRS is less likely to suspect that you are using a raise to disguise a dividend. Both dividends and compensation are taxable to the recipient. But dividends, unlike compensation, cannot be deducted by the corporation.

Date Protection

Dates of the minutes that support the increase can be extra protection. The minutes can show that the decision was made and implemented well before year-end earnings could be accurately projected. Large raises or across-the-board increases granted close to year end, when earnings are high, lead the IRS to see dividends in disguise.

Loan Verifications

Corporate minutes also verify that loans made to executives are loans and not taxable compensation or dividends. They also confirm the nature of such corporate largesse as gifts to individuals (such as to the surviving spouse of a deceased senior executive). Since the IRS considers intention in business actions, your minutes can show that you have sound business motives from the start.

Keep in mind, however, that loans from the corporation to employee/ shareholders must meet other criteria. Nothing you have in writing, including the minutes, will win the day if your loans appear to be dividends. If you fail to repay them, pay interest on them, provide collateral, etc., there is a good chance the IRS will rule that the advances are dividends.

Excess Accumulated Earnings

Corporations can accumulate earnings of up to certain indexed limits. Anything above that may face an excess accumulated earnings tax. Under some circumstances you may keep earnings above the limit without penalty; this is common in scientific and health technology fields. Some of the acceptable reasons for excess accumulation are:

• plans to expand or diversify

• plans to buy new equipment or build up inventory

• projected investment in business-related properties

• to maintain working capital as a hedge against borrowing

• to make loans needed to maintain business

• to provide for actual-potential lawsuits, contested tax or profit loss

• to meet profit-sharing and pension plan obligations

Your plans can be immediate or long-range. They just have to be for a reasonable business purpose. Dates when plans were made and details as to their implementation, when included in corporate minutes, supply proof of that. If you include estimates, market analysis, receipts, and other related documentation of the purpose as part of the record, you will add weight to your case.

Step Transactions

Corporate minutes can also perform the same function for step-transactions. Step transactions consist of steps taken over time toward achieving one objective. Such plans, if recorded in your corporate minutes, can justify your holding on to excess earnings without tax penalty. Even if the plan is abandoned at any “step,” you can state the reasons in your minutes and effectively forestall a penalty.

Retirement and other Pension Plans

To obtain maximum tax savings for your business and your employees, any pension, profit-sharing, or stock-option plan has to satisfy IRS rules. If it does, your employees defer taxes on your contributions and their investment earnings until those funds are distributed to them. Your corporation gets a tax deduction for its contributions.

To get IRS approval, you must submit documentary evidence supporting your plan along with your application. Your corporate minutes supply some of that evidence. They should show the date the plan was adopted and ratified, contain figures demonstrating financial ability, and show that the plan was intended to be permanent. Once you have obtained IRS approval, your annual contributions should be detailed in succeeding corporate minutes to protect your corporate deductions.

Dividends

Your corporate minutes play a part in determining the taxable nature of dividends. Generally, a dividend paid out in the form of stock isn’t taxable to the shareholder until the stock is sold. Dividends paid in cash or property is taxable income in the year they are paid. But if shareholders can choose between taking a dividend in stock or in cash or property, the dividend is taxable to them no matter which method they elect.

To settle such tax questions (and get the best tax results for you), your corporate minutes should clearly reflect the form of dividend being offered to stockholders.

Mergers, Consolidations, etc

To earn tax-exempt status, the minutes must show that a merger or other action serves a bona fide business purpose. It’s OK if the merger will save you taxes, but there must be a business reason as well. For instance, the reorganization will enable you to cut costs, or the merger will bring needed technical skills to the business. The minutes should include a specific plan for the transaction and how it is to be carried out.

Corporate Meetings

One reason for a closely held corporation to hold a “formal” annual meeting is to create corporate minutes. Tax advantages can be further ensured by holding other meetings and recording minutes whenever any major business decision is made. Neither a board meeting nor the corporate minutes recording it need be elaborate or time-consuming. There is not a required format for minutes. Their value lies in what they say, not how they say it, although accuracy and clarity count.

One company officer must be the “secretary,” responsible for calling the meeting, notifying members, drawing up the agenda, and distributing it in advance. The secretary is also responsible for recording the date, time, and place of the meeting, the attendance, and all important matters settled (although someone else can physically take the notes). After the minutes have been prepared, the secretary distributes copies to all board members (and the company attorney). Getting their signatures on the minutes isn’t necessary but can be helpful.

Assessment

Don’t waste time trying to record every point that’s brought up at the meeting. Enter only final decisions. In a closely held corporation, most of the discussion has probably preceded the actual meeting. The meeting serves only to formalize those final decisions—and essential details—for the record.

Conclusion

What is missing from the above, if anything? Your experiences and comments are appreciated.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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