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How long should I keep my tax records for?

Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), it may go back six years in an audit. If there is any indication of fraud, or you do not file a return, no period of limitation exists.To be safe, use the following guidelines.

  • Correspondence with Customers and Vendors
  • Duplicate Deposit Slips
  • Purchase Orders (other than Purchasing Department copy)
  • Receiving Sheets
  • Requisitions
  • Stenographer’s Notebooks
  • Stockroom Withdrawal Forms

Business Documents To Keep For Three Years

  • Employee Personnel Records (after termination)
  • Employment Applications
  • Expired Insurance Policies
  • General Correspondence
  • Internal Audit Reports
  • Internal Reports
  • Petty Cash Vouchers
  • Physical Inventory Tags
  • Savings Bond Registration Records of Employees
  • Time Cards For Hourly Employees

Business Documents To Keep For Six Years

  • Accident Reports, Claims
  • Accounts Payable Ledgers and Schedules
  • Accounts Receivable Ledgers and Schedules
  • Bank Statements and Reconciliations
  • Cancelled Checks
  • Cancelled Stock and Bond Certificates
  • Employment Tax Records
  • Expense Analysis and Expense Distribution Schedules
  • Expired Contracts, Leases
  • Expired Option Records
  • Inventories of Products, Materials, Supplies
  • Invoices to Customers
  • Notes Receivable Ledgers, Schedules
  • Payroll Records and Summaries, including payment to pensioners
  • Plant Cost Ledgers
  • Purchasing Department Copies of Purchase Orders
  • Sales Records
  • Subsidiary Ledgers
  • Time Books
  • Travel and Entertainment Records
  • Vouchers for Payments to Vendors, Employees, etc.
  • Voucher Register, Schedules

Business Records To Keep Forever

While federal guidelines do not require you to keep tax records “forever,” in many cases there will be other reasons you’ll want to retain these documents indefinitely.

  • Audit Reports from CPAs/Accountants
  • Cancelled Checks for Important Payments (especially tax payments)
  • Cash Books, Charts of Accounts
  • Contracts, Leases Currently in Effect
  • Corporate Documents (incorporation, charter, by-laws, etc.)
  • Documents substantiating fixed asset additions
  • Deeds
  • Depreciation Schedules
  • Financial Statements (Year End)
  • General and Private Ledgers, Year End Trial Balances
  • Insurance Records, Current Accident Reports, Claims, Policies
  • Investment Trade Confirmations
  • IRS Revenue Agent Reports
  • Journals
  • Legal Records, Correspondence and Other Important Matters
  • Minutes Books of Directors and Stockholders
  • Mortgages, Bills of Sale
  • Property Appraisals by Outside Appraisers
  • Property Records
  • Retirement and Pension Records
  • Tax Returns and Worksheets
  • Trademark and Patent Registrations

Personal Documents To Keep For One Year

While it’s important to keep year-end mutual fund and IRA contribution statements forever, you don’t have to save monthly and quarterly statements once the year-end statement has arrived.

Personal Documents To Keep For Three Years

  • Credit Card Statements
  • Medical Bills (in case of insurance disputes)
  • Utility Records
  • Expired Insurance Policies

Personal Documents To Keep For Six Years

  • Supporting Documents For Tax Returns
  • Accident Reports and Claims
  • Medical Bills (if tax-related)
  • Sales Receipts
  • Wage Garnishments
  • Other Tax-Related Bills

Personal Records To Keep Forever

  • CPA Audit Reports
  • Legal Records
  • Important Correspondence
  • Income Tax Returns
  • Income Tax Payment Checks
  • Property Records / Improvement Receipts (or six years after property sold)
  • Investment Trade Confirmations
  • Retirement and Pension Records (Forms 5448, 1099-R and 8606 until all distributions are made from your IRA or other qualified plan)

Special Circumstances

  • Car Records (keep until the car is sold)
  • Credit Card Receipts (keep until verified on your statement)
  • Insurance Policies (keep for the life of the policy)
  • Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
  • Pay Stubs (keep until reconciled with your W-2)
  • Sales Receipts (keep for life of the warranty)
  • Stock and Bond Records (keep for 6 years beyond selling)
  • Warranties and Instructions (keep for the life of the product)
  • Other Bills (keep until payment is verified on the next bill)
  • Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)

What tax services will I need for my business?

Ensuring the solidity of financial records for tax is an important part of business. Evaluating your tax procedures to produce strategies that help in the myriad of tax changes in business can only help to ensure your keeping what is rightfully your as the business owner.  There are many various tax review plans that can help and the best way to learn about them is by getting in-touch and learning how Zabel can help. 

How can I reduce my tax liablity?

Many individuals today are looking to find ways to save federal and state taxes using generally excepted principals by the IRS.  Over the years the tax codes have developed many unknown deductions to individuals that can be used as financial planning tools that may help you reduce your tax bill.

Charitable Giving – Instead of selling your appreciated long-term securities, donate the stock instead and avoid paying tax on the unrealized gain while still getting a charitable tax deduction for the full fair market value.

Health Savings Accounts (HSAs) – If you have a high deductible medical plan you can open an HSA and make tax deductible contributions to your account to pay for medical expenses. Unlike flexible spending arrangements (FSAs), the contributions can carry over for medical expenses in future years.

ROTH IRAs – Contributions to a ROTH IRA are not tax deductible but the qualified distributions, including earnings are tax-free.

Municipal Bonds – Interest earned on these types of investments is tax-exempt.

Own a home – most of the cost of this type of investment is financed and the interest (on mortgages up to $1,000,000) is tax deductible. When the property is sold, individuals may exclude up to $250,000 ($500,000 if married jointly) of the gain.

Retirement Plans – Participate in your employer sponsored retirement plan, especially if there is a matching component. You will receive a current tax deduction and the tax-deferred compounding can add up to a large retirement savings.

Can I deduct my mortgage interest?

The simple answer is yes, if you own a home, and you itemize your deductions on Schedule A, you can claim a deduction for the interest paid. To be deductible, the interest you pay must be on a loan secured by your main home or a second home (including a second home that is also rented out for part of the year, so long as the personal use requirement is met). The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. To be deductible, the loan must be secured by your home but the proceeds can be used for other than home improvements. You can refinance and use the proceeds to pay off credit card debt, go on vacation or buy a car and the interest will remain deductible. There are other financial reasons for not wanting to do this but it will not disqualify the deduction.

The interest deduction for home acquisition debt (that is, a loan taken out after October 13, 1987 to buy, build, or substantially improve a qualified home) is limited to debt of $1 million ($500,000 if married filing separately). The interest deduction from your home equity loan is also not unlimited. You can generally deduct interest you pay on the first $100,000 of a home equity loan. Debt which you incurred to buy, build or substantially improve your home that is in excess of the $1 million home acquisition debt limit may also qualify as home equity debt.

In addition to the deduction for mortgage interest, points paid on the original purchase of your residence are also generally deductible. Taxpayers who are required to pay mortgage insurance premiums may also be able to deduct this amount subject to certain income limits. For more information about the mortgage interest deduction, see IRS Publication 936.

What are capital gains or losses and how do they effect me?

Most individuals dont think about accounting when it comes to use for personal purposes, pleasure or investment is a capital asset. Almost everything you own is an asset and the IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property. A “paper loss” — a drop in an investment’s value below its purchase price — does not qualify for the deduction. The loss must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For more information on the tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets. If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately). Unused capital losses can be carried over indefinitely to future years to net against capital gains, however the annual limit still applies.

Capital gains and losses are reported on Form 8949Sales and Other Dispositions of Capital Assets, summarized on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. Accounting and planning for the sale and purchase of capital assets is usually a very complicated matter, so please contact us so that you may receive the professional advice you deserve.

What is a Coverdell Education Savings Account (ESA)?

A Coverdell Education Savings Account (ESA) is a savings account created as an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary (who is under age 18 or is a special needs beneficiary) of this account in any year cannot be more than $2,000, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than a beneficiary’s qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross (MAGI) income is less than an annual, constantly changing maximum. Usually, MAGI for the purpose of determining your maximum contribution limit is the adjusted gross income (AGI) shown on your tax return increased by the following exclusion from your income: foreign earned income of U.S. citizens or residents living abroad, housing costs of U.S. citizens or residents living abroad, and income from sources within Puerto Rico or American Samoa. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

How can I decide if I have a business or a hobby?

Great question let’s see if we can help. It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take. You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.

The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

  1. You carry on the activity in a business-like manner,
  2. The time and effort you put into the activity indicate you intend to make it profitable,
  3. You depend on income from the activity for your livelihood,
  4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
  5. You change your methods of operation in an attempt to improve profitability,
  6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
  7. You were successful in making a profit in similar activities in the past,
  8. The activity makes a profit in some years, and
  9. You can expect to make a future profit from the appreciation of the assets used in the activity.

Is my business eligibility for a schedule C-EZ?

Your business may be eligible to use the abbreviated Schedule C-EZ instead of the longer Schedule C when reporting business profit and loss on your federal income tax return, according to the IRS. That’s because the deductible business expense threshold for filing Schedule C-EZ of the Form 1040 is $5,000. This change allows an additional 500,000 small businesses to file the C-EZ rather than Schedule C.

Schedule C-EZ, Net Profit from Business (Sole Proprietorship), is the simplified version of Schedule C, Profit or Loss from Business (Sole Proprietorship).

Schedule C-EZ consists of an instruction page and a one-page form with three short parts — General Information, Figure Your Net Profit, and Information on Your Vehicle. The instruction page includes a worksheet for figuring the amount of deductible expenses. If that amount does not exceed $5,000, you should be able to use the C-EZ instead of Schedule C. 

Can I deduct expenses for my home office?

The quick answer is yes. Whether you are self-employed or an employee, if you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.

You can deduct certain expenses if your home office is the principal place where your trade or business is conducted or where you meet and deal with clients or patients in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.

Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business. There must be no other fixed place where you conduct substantial administrative or management activities. If you use both your home and other locations regularly in your business, you must determine which location is your principle place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn’t determine your principle place of business, you can also consider the time spent at each location.

If you are an employee, you have additional requirements to meet. You cannot take the home office deduction unless the business use of your home is for the convenience of your employer. Also, you cannot take deductions for space you are renting to your employer.

Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses.

Is there a tax filing deadline or payment options I can use?

Tax, tax, tax. If you’re trying to beat the tax deadline, there are several options for last-minute help. If you need a form or publication, you can download copies from the IRS Tax Forms in our support center. If you find you need more time to finish your return, you can get a five or six month extension of time to file using Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, Other Returns. And if you have trouble paying your tax bill, the IRS has several payment options available.

The extension will give you extra time to get the paperwork to the IRS, but it does not extend the time you have to pay any tax due. You have to make an accurate estimate of any tax due when you request an extension. You can also send a payment for the expected balance due, but this is not required to get the extension. However, you will owe interest on any amounts not paid by the March 15 deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.