Now is the time for contractors to take a long look at themselves-and discern what needs to be done to boost their appeal to the surety industry. Most contractors know the importance of proper documentation when preparing a billing requisition. If the i's aren't dotted and the t's aren't crossed, there could be a delay of days or weeks in getting paid. This can be particularly so when trying to get payment from a governmental agency. While you may have the good fortune to have never been audited, if the IRS ever decides to examine your company's tax return, the lack of proper documentation could end up costing you thousands of dollars in taxes, interest and penalties.
Many contractors award year end bonuses to shareholders.
These payments may be made pursuant to an incentive compensation arrangement, or may simply be amounts agreed upon among the shareholders as a reward for a good year. Recently the IRS disallowed a corporate taxpayer a deduction for year end bonuses paid to shareholders even though it acknowledged that a substantial portion of the bonuses were reasonable amounts of compensation for the services rendered. The IRS contended that the bonuses were not paid with the intent to compensate, but rather with the intent to distribute dividends. The company took the IRS to court and in a lower court decision, upheld on appeal, the position of the IRS was affirmed. What was probably the nail in the coffin against the company's case was a provision in its incentive compensation agreement indicating that the bonuses were to be made in accordance with stock ownership percentages.