Marietta Financial Services | CPA Indianapolis

September 22nd 2011 by Andrew Poulos

As the economy has taken a downturn and tax revenues have declined, Congress and the Treasury Department have put the pressure on the IRS to generate additional tax revenues. As a result, the IRS has issued its opinion regarding higher audit enforcement.

One of the areas of high enforcement is reasonable officer compensation for shareholders of Subchapter S Corporations. This topic is on the IRS hot list because, oftentimes, people misinterpret the Internal Revenue Code (IRC) and Treasury regulations. The code and regulations are vague and don’t clearly define reasonable compensation for shareholders. In other instances, shareholders of S Corporations abuse the law in order to generate a tax savings’ benefit. The consequences of misinterpretation or abuse of the law can be quite costly if a business gets under audit for reasonable officer compensation. The liability can add up to be as much as two to three times what would have been due originally – had reasonable compensation been paid.

Although the IRC does not define what constitutes reasonable officer compensation, it does state that shareholders of S Corporations are included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding. The law requires corporate officers (shareholders) who perform services for the corporation, and receive or are entitled to receive payments, to have their compensation considered wages.

In addition, courts have consistently held that officers/shareholders of S Corporations who provide more than minor services to their corporation and receive or are entitled to receive compensation, are considered employees and the payment is considered taxable for federal employment tax purposes. If this is the case, then why is the law vague as it relates to reasonable compensation? The more the gray area in tax law, the easier it is for the IRS to increase audit enforcement and generate new tax revenues during a challenging economic environment.

This article was provided by Intuit ProLine News Central

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Governor Mitch Daniels a few weeks ago signed HB 1004, reducing Indiana’s corporate income tax rate from 8.5 percent to 6.5 percent, a decrease of nearly 25 percent.

The measure, sponsored by Sen. Brandt Hershman, will begin reducing the Indiana corporate tax rate by 0.5 percent per year over the next four years to a final rate of 6.5 percent. 

“While other states are raising taxes to deal with major budget shortfalls, Governor Mitch Daniels and Indiana’s General Assembly were able to cut taxes and improve our state’s jobs climate, all while passing a balanced budget.  Indiana’s business environment already ranks near the top of the pack in most every third-party analysis and this reduction will only strengthen our reputation as a place to invest and create jobs,” said Mitch Roob, Secretary of Commerce and chief executive officer of the Indiana Economic Development Corporation.    

Indiana’s corporate income tax reduction comes just four months after neighboring state Illinois increased its business tax burden from 7.3 percent to 9.5 percent, a rate that gives the state the fourth-highest combined national-local corporate income tax rate in the industrialized world, according to the Tax Foundation.

“By reducing the tax burden for businesses we are sending a strong message to company decision-makers from coast-to-coast and around the world that Indiana is serious about competing for their business and will continue to work to make our state the best possible place to grow,” said Hershman. 

Since Governor Daniels was elected in 2004, he has taken several measures to improve the state’s attractiveness for business.  Among them include:

. Increased R&D tax credit – Provides a tax credit equal to 15 percent of a company’s first $1 million of qualifying R&D expenditures, giving Indiana one of the highest R&D tax credit percentages in the country. (2005)

. R&D Sales Tax Exemption – Exempts purchases of eligible research and development equipment from the Indiana state sales tax. (2005)

. Single Sales Factor Corporate Tax – The single-sales factor apportionment calculates the Indiana portion of corporate taxes based solely on the portion of a company’s sales in Indiana. (2006)

. Major Moves – Indiana is the only state in the nation with a record-breaking, fully-funded 10-year infrastructure improvement plan that includes the construction or renovation of more than 400 roads and bridges – all without raising taxes or borrowing money.  (2006)

. Telecommunications Reform – Indiana’s Telecommunications Deregulation Act has made the state a national leader in telecom reform by increasing competition among carriers, resulting in lower prices, new investments and new jobs. (2006)

. Property Tax Relief – Cut property taxes by one third and established a constitutional cap on tax rates for all classes of property. (2008, 2010)

These measures, coupled with years of balanced budgets and fiscal discipline, have earned the state a AAA credit rating from all three bond rating agencies, a first in state history.

The corporate income tax reduction news comes on the same week that Amazon.com cited Indiana’s business-friendly policies as the reason it will open a 900,000-square-foot Internet order fulfillment center in Indianapolis this summer, bringing hundreds of jobs.