Monthly Archives: June 2015

Tossing Old Tax Records? Read This First!

Old Tax Records, Tossing Old Tax Records, Old Records, Files
Now that your taxes have been completed for 2014, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have old records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place.

Why Do We Keep Old Tax Returns?

Generally, we keep old tax records for two basic reasons:

  1. In case the IRS or a state agency decides to question the information reported on our tax returns.
  2. To keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them.

How Long Before We Can Toss Our Old Tax Records?

With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal law. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years. This is if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes do not begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded. Again, take note that you should add a year or so to that if you live in a state with a longer statute.

Examples – Sue filed her 2011 tax return before the due date of April 15, 2012. She will be able to dispose of most of the 2011 records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years.

Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The Big Problem!

So what’s the problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired? The problem is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Therefore, it makes more sense to keep those records separated by asset.

The following are examples of records that fall into that category:

  • Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit or loss you had on the sale.
  • Stock and mutual fund statements (If you reinvest dividends) – Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property. This means they reduce gain when it is finally sold. Keep the statements at least four years after the final sale.
  • Tangible property purchase and improvement records – Keep all records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records. The thinking was that the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains. This is particularly the case in markets where property values have steadily risen. Records of home improvements are vital. The records can be important to prove your deductions. Please use caution when discarding them.

What about the tax returns themselves?

Disposal of the back-up documents used to prepare the returns can usually be done after the statutory period has expired. However, you may want to consider keeping a copy of your old tax returns. These should include the 1040 and any attached schedules or statements,  plus your state return indefinitely. That’s right, forever! If you just do not have room to keep a copy of the paper returns, securely digitizing them is an option. Use caution when opting to do this. Remember, the cloud is a very curious place for your personal information, and hackers would love to get their hands on it.

Do you have more questions about tossing old tax returns?

If you have questions about whether or not to retain certain old tax records, WorthTax can help you work through all the documents. Give Alex Franch, a call first at 781-849-7200, and make an appointment today.

We would love to hear your thoughts about your solutions to saving old tax records below or feel free to visit our Facebook or Google+ page.

Maybe you know someone who can benefit from this information, feel free to share:
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5 Accounting Tips That Will Make Managing Your Small Business a Breeze

Accounting tips, accounting, tipThese accounting tips are beneficial if you are the owner of a small business. After all, you are endlessly busy. Between keeping track of the day-to-day requirements and monitoring growth and profit, it is easy to get overwhelmed. That means you might neglect important recordkeeping that will help you in the long term. Here are five helpful accounting tips and hints that will make accounting easier. Make sure that you do not miss any milestones or deadlines.

1. Business and personal expenses should be kept separate.

It is easy to make the mistake of using your business credit card for personal expenses and vice versa. Those errors can always be amended through reimbursements and revised record-keeping. However, you will save yourself a lot of time, trouble and aggravation if you keep the two types of expenses completely separate from the start.

2. Do not underestimate the difficulty of your taxes. Hire a tax professional.

Since you are smart enough to run your own business, it is natural to assume that you can save yourself the expense of hiring a tax professional to file your taxes. The truth is that there is a lot more to accounting then filling in forms. A tax professional will be familiar with deductions you do not realize you are entitled to take. Your tax professional will also inform you of an underpayment that might lead to trouble down the road.

3. Be realistic about upcoming expenses.

When things are moving along smoothly, it is natural to assume that the status quo will remain. You need to be realistic. Anticipate that office equipment will wear down or needs to be upgraded. Staffing needs will change, and overhead costs are unlikely to remain the same. By planning for future major expenses and setting aside funding for those possibilities, you will save yourselves many headaches in the future.

4. Do not forget your employees when calculating expenses

A lot of business owners will sit down to forecast their expenses or try to figure out where their money is going. However, they forget to give proper weight to the amount that they are spending on staffing expenses such as insurance, health care and payroll taxes. Your employees are generally one of your biggest assets. It is important that when you are calculating costs, you make sure that you have not forgotten about all of the expenses involved with keeping them, as well as with expanding your business.

5. Do not lose sight of your Accounts Receivables

If you were an employee of a business that failed to give you a paycheck, you would be more than just upset. You would take action to make sure that you get paid. Yet many owners of small businesses get so enmeshed in the minutia and big decisions of their day-to-day operations that they lose track of whether clients are paying promptly and what percentage of invoices remain open. Falling behind on your record keeping, such as accounts receivables, is not a good idea. It causes things get so far behind that it becomes costly and difficult to collect. You may end up not getting paid or fostering negative feelings. Track payments as they come in. Note how far behind payments due are. And, take note of which clients are presenting you with collection problems.

Do You Need More Accounting Tips?

These accounting tips are straightforward and simple. Following them can make a significant difference in your ability to keep your business on track. These accounting tips will keep your forecasts accurate. They will allow you to take action when it is needed removing the emotion and keeping your collections factual. For more tips, read about the Top 4 Accounting Mistakes Small Businesses Make.

For more information on other steps you can take, contact Alex to make an appointment for a consultation. Also, we would love to hear your comments below or go to our Facebook or Google+ page and let us know your thoughts.

Maybe you know someone who can benefit from this information, feel free to share:
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