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If you’ve been in business for any amount of time, you’ve probably heard something about keeping your receipts. And we’ve heard some good myths about when and when you don’t have to keep them. We’re here to set the record straight and tell you exactly when you need to keep receipts.
First, let me explain that there are different suggested records for different types of transactions. For example, what you keep to prove the purchase of inventory is different than gas for your car. We’re going to explore two categories today: General, and Travel/Entertainment expenses. But there are many more that we’re not discussing today.
What are they?
General expenses are things like paper, utilities, cell phone, etc. Those types of expenses must be be proved with a bank/credit card statement, receipt, or invoice that shows the date, amount, and busienss purpose.
How long should I keep records for?
Generally speaking, you’ll want to keep records for at least 3 years from when you claimed them on your tax return. The good news is that you can keep them in paper form, or electronically. We’re a big fan of using the mobile app for Xero to take a snapshot of the receipt, and recording the transaction right on the spot when it happens. You can also use other systems like Evernote, Google Drive, Dropbox and Box to store your records. If you choose to keep paper, then have a good file system organized by year and type of expense, at the very least.
What are they?
Just as it sounds, expenses you incur to travel, take clients out to lunch. It also covers lodging, rental cars, transportation, and a host of other things. See IRS Publication 463 that is referenced below for more things that qualify as travel and entertainment expenses.
How should I keep records and for how long?
The trick here is to have “adequate” records. There are 4 main points that you must prove in order to have a deemed adequate expense in this category:
What that basically means is that you must have a receipt, log book, or some kind of record that proves those 4 main points for each expenses you deduct. Estimates don’t count. The long and short of this is: that you keep all receipts/invoices for each expense in this category. There are only a few exceptions, one of them being that if your expense in under $75 (except lodging), you can simply provide bank statements to prove you expense. Of course there are more exceptions, but we don’t have time to go into them in this post.
And like above, you should keep these records for 3 years after you file the tax return for the year you’re taking the deduction in.
The IRS has some pretty elaborate articles and publications on this topic. We referenced IRS Publication 463. Feel free to check it out if you need to dive in a bit deeper. Or, leave a comment and reach out to us and we can help you navigate the murky waters of business deductions.
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What should you do if you already filed your federal tax return and then discover a mistake? First of all, don’t worry. In most cases all you have to do is file an amended tax return. But before you do that, here are 10 facts you should be aware of when filing an amended tax return.
1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended tax return. An amended return cannot be e-filed. You must file it on paper. Contact us if you need assistance or have any questions about Form 1040X.
2. Consider filing an amended tax return if there is a change in your filing status, income, deductions or credits.
3. In most cases, you do not need to file an amended return to correct math errors because the IRS automatically makes those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will send a request asking for those.
4. Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. Be sure to enter the year of the return you are amending at the top of Form 1040X.
5. If you are amending more than one tax return, prepare a 1040X for each return and mail them to the IRS in separate envelopes. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.
6. If your changes involve the need for another schedule or form, you must attach that schedule or form to the amended return.
7. If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 12 weeks to process. You may cash your original refund check while waiting for the additional refund.
8. If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties.
9. You can track the status of your amended tax return for the current year three weeks after you file. You can also check the status of amended returns for up to three prior years.
10. To use the “Where’s My Amended Return” tool on the IRS website, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each.
Questions about amended returns? Give us a call today. We’ll take care of it so you don’t have to.Read More
Filing a past due return may not be as difficult as you think.
Taxpayers should file all tax returns that are due, regardless of whether full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. It is important, however, to know that full payment of taxes upfront saves you money.
Gather Past Due Return Information
Gather return information and come see us. You should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.
Payment Options – Ways to Make a Payment
There are several different ways to make a payment on your taxes. Payments can be made by credit card, electronic funds transfer, check, money order, cashier’s check, or cash.
Payment Options – For Those Who Can’t Pay in Full
Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be lessened. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, a temporary delay, or an offer in compromise.
Taxpayers who need more time to pay can set up either a short-term payment extension or a monthly payment plan.
What Will Happen If You Don’t File Your Past Due Return or Contact the IRS
It’s important to understand the ramifications of not filing a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions.
If you haven’t filed a tax return yet, please contact us. We’re here to help!Read More
Confused about which credits and deductions you can claim on your 2012 tax return? You’re not alone. Even in an ordinary tax year, it’s hard to remember which tax breaks you can take, but the fiscal cliff fiasco this year made it even more difficult to keep everything straight. With that in mind here are six tax breaks for 2012 that you won’t want to overlook.
Thanks to the fiscal cliff deal, the sales tax deduction, which expired at the end of 2011, was reinstated retroactive to 2012 (it expires at the end of 2013). As such, IRS allows for a deduction of either state income tax paid or state sales tax paid, whichever is greater.
If you bought a big ticket item like a car or boat in 2012, it might be more advantageous to deduct the sales tax, but don’t forget to figure any state income taxes withheld from your paycheck just in case. If you’re self-employed you can include the state income paid from your estimated payments. In addition, if you owed taxes when filing your 2011 tax return in 2012, you can include the amount when you itemize your state taxes this year on your 2012 return.
Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. This child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent. The credit is worth a maximum of $1,050 or 35% of $3,000 of eligible expenses per dependent.
Job search expenses are 100% deductible, whether you are gainfully employed or not currently working–as long as you are looking for a position in your current profession. Expenses include fees paid to join professional organizations, as well as employment placement agencies that you used during your job search. Travel to interviews is also deductible (as long as it was not paid by your prospective employer) as is paper, envelopes, and costs associated with resumes or portfolios. The catch is that you can only deduct expenses greater than 2% of your adjusted gross income (AGI).
Typically, a taxpayer is only able to deduct interest on mortgages and student loans if he or she is liable for the debt; however, if a parent pays back their child’s student loans the money is treated by the IRS as if the child paid it. As long as the child is not claimed as a dependent, he or she can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.
Most people know that medical expenses are deductible as long as they are more than 7.5% of AGI for tax year 2012 (10% in 2013). What they often don’t realize is what medical expenses can be deducted such as medical miles (23 cents per mile) driven to and from appointments and travel (airline fares or hotel rooms) for out of town medical treatment.
Other deductible medical expenses that taxpayers might not be aware of include: health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.
If you’ve loaned money to a friend, but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 per year. To qualify however, the debt must be totally worthless, in that there is no reasonable expectation of payment.
Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.
Are you getting all of the tax credits and deductions you are entitled to? Maybe you are…but maybe you’re not. Why take a chance? Make an appointment with us today and we’ll make sure you get the tax breaks you deserve.Read More
One of the biggest hurdles you’ll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux making the Internal Revenue Code barely understandable to most people.
The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. On the flip side, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they’re legally entitled to that can help them lower their tax bill.
Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.
Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.
When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.
Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.
Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.
For tax years beginning in 2010, you can elect to deduct up to $10,000 of business start-up costs paid or incurred after 2009. The $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. Any remaining costs must be amortized.
The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.
Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
While it used to be a red flag, this is no longer true–as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.
And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If you have any questions, don’t hesitate to give us a call today. We’re here to assist you.Read More
Whether you’re self-employed or an employee, if you use a car for business, you get the benefit of tax deductions.
There are two choices for claiming deductions:
For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.
Tip: The actual cost method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.
The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to bypass certain limits and restrictions and is simpler– but it’s often less advantageous in dollar terms.
Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage.
Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.
Keep careful records of your travel expenses and record your mileage in a logbook. If you don’t know the number of miles driven and the total amount you spent on the car, we won’t be able to determine which of the two options is more advantageous for you.
Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method for your auto deductions, you must keep receipts.
Tip: Consider using a separate credit card for business, to simplify your recordkeeping.
Tip: You can also deduct the interest you pay to finance a business-use car if you’re self-employed.
Note: Self-employed individuals and employees who use their cars for business can deduct auto expenses if they either (1) don’t get reimbursed, or (2) are reimbursed under an employer’s “non-accountable” reimbursement plan. In the case of employees, expenses are deductible to the extent that auto expenses (together with other “miscellaneous itemized deductions”) exceed 2% of adjusted gross income.
We will help you determine the best deduction method for your business-use car. Let us know if you have any questions about which records you need to keep.Read More
The end of the tax filing season is almost here. Even though your tax return is not due until April 15, you can make tax time easier on yourself by starting now. Here are 10 important tips to ensure a smooth process.
1. Gather your records. Round up any documents you will need when filing your taxes, including receipts, canceled checks and other documents that support income or deductions you will be claiming on your tax return. Store them in a safe place.
2. Report all your income. You will need all your Forms W-2, Wage and Tax Statements, and 1099 income statements to report your income when you file your tax return. To ensure you don’t misplace them, add them to your other records.
3. Get answers to questions. Use the Interactive Tax Assistant tool available on the IRS website to find answers to your questions about tax credits and deductions.
4. Use Free File. There is at least one option available for everyone to prepare and e-file a tax return at no cost. Let IRS Free File do the work for you with brand-name tax software or online fillable forms. It’s available exclusively at IRS.gov. If your income was $57,000 or less, you qualify to use free tax software. If your income was higher, or you are comfortable preparing your own tax return, there’s Free File Fillable Forms, the electronic version of IRS paper forms. Visit IRS.gov/freefile to review your options.
5. Try IRS e-file. IRS e-file is the best way to file an accurate tax return. It’s safe, easy and the way most taxpayers file their return. Last year, more than 80 percent of taxpayers used IRS e-file. Many tax preparers are now required to use e-file. If you owe taxes, you have the option to file early and pay by April 15.
6. Weigh your filing options. You have several options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free, face-to-face help at a volunteer site. Weigh your options and choose the one that works best for you.
7. Use direct deposit. Combining e-file with direct deposit is the fastest and safest way for you to get your refund.
8. Visit the IRS website. The IRS website at IRS.gov is a great place to find everything you need to file your tax return. This includes many online tools, filing tips, answers to frequently asked questions, the latest tax law changes, forms and publications.
9. Remember number 17. Check out Publication 17, Your Federal Income Tax, on the IRS website. It’s a complete tax resource that includes information such as whether you need to file or how to choose your filing status.
10. Review your return. Don’t rush. We all make mistakes when we rush. Mistakes slow down the processing of your return. Be sure to double check all Social Security numbers and math calculations on your return as these are the most common errors. If you run into a problem, remember the IRS is here to help. Start with IRS.gov.Read More
All Social Security recipients should receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits.
But many people may not realize the Social Security benefits they received in 2012 may be taxable. The information outlined below should help you determine whether those benefits you receive in 2012 are taxable or not.
1. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status.
2. Generally, if Social Security benefits were your only income for 2012, your benefits are not taxable and you probably do not need to file a federal income tax return.
3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status (see below).
4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Your tax software program will also figure this for you.
5. You can do the following quick computation to determine whether some of your benefits may be taxable:
6. The 2012 base amounts are:
Confused? Give us a call. We’ll make sure you receive all of the Social Security benefits you’re entitled to.Read More
Being in debt isn’t necessarily a terrible thing. Between mortgages, car loans, credit cards, and student loans, most people are in debt. Being debt-free is a worthwhile goal, but most people need to focus on managing their debt first since it’s likely to be there for most of your life.
Handled wisely, that debt won’t be an albatross around your neck. You don’t need to shell out your hard-earned money because of exorbitant interest rates or always feel like you’re on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay it off faster.
First, assess the depth of your debt. Write it down, using pencil and paper, a spreadsheet like Microsoft Excel, or a bookkeeping program like Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and when it will end (if possible), the interest rate you’re paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged! Remember, you’re going to break this down into manageable chunks while finding extra money to help pay it down.
Yes, some debts are more expensive than others. Unless you’re getting payday loans (which you shouldn’t be), the worst offenders are probably your credit cards. Here’s how to deal with them.
Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
Do you really need the 800-channel cable option or that dish on your roof? You’ll be surprised at what you don’t miss. How about magazine subscriptions? They’re not terribly expensive, but every penny counts. It’s nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.
Not only are you retiring debt, but you’re also building a stellar credit rating. If you ever move or buy another car, you’ll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.
To avoid increasing debt load, make it a habit to pay with cash. If you don’t have the cash for it, you probably don’t need it. You’ll feel better about what you do have if you know it’s owned free and clear.
If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam’s or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. Use coupons religiously. Calculate the money you’re saving and slap it on your debt.
Each of these steps, taken alone, probably doesn’t seem like much. But if you adopt as many as you can, you’ll watch your debt decrease every month. If you need help managing debt give us a call. We can help.Read More