In The Black

Amanda Eaves CPA

“If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” – Thomas Jefferson

In business today, and particularly in professional service industries, it is something that is in constant creation.  It is imagination made real. It is the ownership of dream, an idea, an improvement, an emotion that we can’t touch, see, hear, and feel. It is an asset just like your home, your car, or your bank account.  Just like other kinds of property, intellectual property needs to be protected from unauthorized use. If you are an intellectual property owner, you should protect your rights. If you are a user, you should respect them. It is just as wrong to steal intellectual property as it is to break into a home, steal a car, or rob a bank.

So, you feel that your IP rights are fully covered with patents, trademarks, copyrights, or as trade secrets?  Think again. In this world of “job-hopping” employees, high competition, and easy and portable access to all types of company information that may not be enough.  The following should also be considered:

1. Protect your IP – both in the United States and in other countries where you do business and source products. Most IP rights are territorial, meaning, for example, a U.S. patent or trademark only provides protection in the United States. To receive IP protection in other countries, you need to apply for protection in those countries.  For more information on how to find information intellectual property in other countries click here.
2. Research and consider IP insurance policies such as defense insurance, enforcement insurance, unauthorized disclosure insurance, and multi-peril insurance.
3. Anticipate trade secret leaks. Read more here.

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Amanda Eaves CPA

Although the IRS gives no specific guidelines on this, Some factors considered by the courts in determining reasonable compensation are as follows:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

So, what is the IRS so concerned about?  The considerations for an S corporation are much different from those of a C corporation. If you are a closely held C corporation, the IRS is likely to be concerned with whether the compensation paid for personal services rendered by an employee-shareholder is excessive and is being used to avoid a second level of tax in the form of a dividend distribution. However, if you are an S corporation, the IRS believes that employee-shareholders, particularly those who provide professional services, have an incentive to draw a minimal salary in order to reduce their payroll tax liability.

The safest way to protect your company and its owners is to document…document…. document your facts and circumstances using the factors above for employee-shareholder compensation.  Another way to determine reasonable salaries is by using a survey of similar industries and positions. “You simply need good evidence of why your salary (low as it might be) is a reasonable salary. Look to your trade association for evidence.”

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