It’s not uncommon for a closely held corporation to pay for some of the personal expenses of its officer-stockholders.  On its balance sheet, the business treats such transactions as “loans to officers” which the stockholder owes the company.  Although some business owners think that this practice is to their advantage, it can ultimately result in unnecessary higher taxes.

Paul Page is a good example.  A natural salesman, Paul began his business career by putting his talents to work for a residential real estate broker.  From the beginning, he was a success.  When Paul showed a house to a buyer, it was only a matter of time until the “For Sale” sign was covered by a “Sold” sign.

But Paul’s ambition went beyond being a successful real estate salesman, for he had always dreamed of being in business for himself.  When he saw that his reputation was attracting more and  more real estate listings for his employer, Paul knew the time was right to turn his dream into reality and Page Properties, Inc. was born.

The company was an immediate success and generated enough income to pay Paul an annual salary of $90,000 and still show a healthy profit.  In addition, the business paid an average of about $20,000 a year for some of Paul’s personal expenses.  The corporation classified these payments as “loans to officers: and Paul paid a portion of them back to the company each year.

For the taxable year ending December 31, 2007, Page Properties, Inc., reported taxable income of $80,000 and paid $15,450 in federal corporate income tax.  Paul also filed his personal 2007 individual income tax return and made his annual contribution to the IRS on his $90,000 salary.  By the end of 2007, the amount that Paul owed his company for its payment of his personal expenses was $20,000.  However, since the company treated it as a loan to officers, Paul felt comfortable that it wasn’t taxable income to him.


Paying IRS notices.  Always specify on the check what tax you are paying.  Pitfall:  The IRS can apply payments that are not described to any outstanding tax liability that you may have, or that you may not be aware of.  The result can be having to pay penalties and interest on a tax that you thought you had paid.


One of the most common questions asked by business owners is how long they should keep their business records.  The answer depends on several factors: the type of business and what state or regulatory agency requirements apply, for example.  But although there’s no hard-and-fast answer to the problem, the following general guidelines apply to most businesses.

Keep for One Year:

Receiving sheets

Duplicate bank deposit slips


Stockroom withdrawal slips

Bank reconciliations

Purchase orders


Keep for Two Years:

Proxies of voting stockholders


Keep for Three Years:

Insurance policies

Petty cash slips


Physical inventory tags

Internal reports

Employment applications


Keep for Five Years:

Internal audit reports

Excise tax computations


Keep for Seven Years:

Payroll records and related documents

Canceled stock and bond certificates

Accounts payable ledgers

Accounts receivable ledgers

Customer invoices

Vendor invoices

Subsidiary ledgers

Time cards

Vouchers for payments to vendors

Inventory records

Expense analysis schedules

Contracts and leases

Canceled checks

Purchasing department copy of purchase orders

Scrap and salvage records

Sales records


Keep Permanently:

Deeds and mortgages

Credit history

Cash ledgers

Property appraisals

Contracts and leases – major

Accountants’ report

Canceled checks for large and important papers

Insurance records


Trademark registrations

Bills of sale for important purchases

Financial statements

Minute books, bylaws and certificate of incorporation

Correspondence – major matters and legal

Tax returns

Chart of accounts

Records dealing with the company’s capital structure

Property records

General ledgers


Pitfall: Transfers of money to an IRA from a pension plan.  There is a 60-day time period to transfer money from a company pension plan to an IRA. If the transfer is not made within 60 days, the entire amount will be subject to income tax. Added pitfall: If you have not reach age 59 1/2, you will have to pay an additional 10% penalty.