Straight cash

Cash basis taxpayers can make decisions during these last few days of December to improve their tax situation.

Cash basis taxpayers report income and expenses in the year that they actually occurred.  This allows cash basis taxpayers to defer income or accelerate expenses as the situation requires.

Income

Income must be recognized by a cash basis taxpayer when it has been constructively received and is available to the taxpayer.  If a taxpayer receives a check in January for work performed in December, that income is taxable in the next year.  However, if a taxpayer receives a check in December for work performed in December but puts it in a drawer and doesn't deposit the check until January, this is still income to the taxpayer because it had been constructively received and was available in December.  With this being the case, tax basis taxpayers can manage their cash inflows at year-end by sending out bills later to defer collection to next year, or requiring customers to prepay if more cash/income is needed.

Expenses

Expenses can be recognized by a cash basis taxpayer in the year paid or charged.  Yes, you read that correctly, charged.  The IRS will allow charges on a credit card as cash basis expenditures, even if the bill is not paid until the next month.  This provides some wiggle room for businesses that have cash flow concerns at year-end, because they can use a credit card to make purchases instead of cash.

Cash basis taxpayers can also use the end of the year to stock up on capital assets, especially right now due to the expiring Section 179 and Bonus depreciation provisions.

A word of caution: just because an entity is a cash basis taxpayer does not mean that every cash expense is deductible.  All expenses must still be properly substantiated and properly deductible.

Cash basis taxpayers should also consider their business operations when making year-end decisions on spending.  Yes, buying $5,000 of office supplies on New Years Eve will reduce the tax burden on the entity, but will that cash outlay penalize the business operations in January?

 

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.