Is Incorporation for You?

If you’re not good at paperwork, the corporate form of business is probably not for you.
 
Let me tell you about a tax court case involving William H. Bruecher III. He learned a lesson by paying more than $27,000 in taxes on monies his corporation supposedly loaned to him. Mr. Bruecher’s corporation did not pay him a salary; rather, the corporation paid his personal expenses, classifying the payments as advances.

Intent to Repay
 
To decide whether there is intent to repay, the court looks at four factors and all factors must be satisfied as reasonable.
  
Neither Mr. Bruecher nor his corporation could produce any proof of these. Further, the very personal nature of some of the advances (the description of the payment) got the court’s attention.
 
In court, Mr. Bruecher delivered his self-serving testimony and presented as evidence the corporate tax return, on which the advances were classified as loans. Not good enough, ruled the court, as it made the advances taxable dividends to Mr. Bruecher.
 
Takeaways
 
When you operate as a corporation, the corporation is a separate legal entity, and you should have a corporate paper trail that clearly reflects intent and action.
 

• C corporation. 
• S corporation. 

Both have specific strategies that will help satisfy the courts.  If this story relates to some of the actions you are doing, you need a plan, as you are at risk of paying taxes plus penalty and interest if you are required to recategorize those payment.

Contact us so we can set up a plan for you.

Questions?