Why should I keep records?
All businesses are required to keep records to support gross income, deductions, and credits claimed on income tax returns. Businesses should have permanent sets of books that summarize individual deposits, disbursements, and items of adjustment. Records such as these should be kept indefinitely. Records needed to prove the basis (cost) of depreciable assets should also be permanently kept.
If returns are examined by the IRS, supporting documents may be needed to validate journal entries. Generally, supporting documents should be kept until the statute of limitations for a tax year has passed. The IRS reviews bank statements, canceled checks, payroll records, invoices, etc. when they examine supporting documents and returns.
Returns can be audited for up to three years after filing unless income is underreported by 25% or more. In the latter case, the IRS can collect underpaid taxes up to six years later. Good records are needed to validate what you report on tax returns. Furthermore, if records are organized, your accountant will need less time to review your records, which may result in lower tax preparation fees.
If you have inadequate records to support claims on your returns, the IRS has the authority to reconstruct your income using methods such as estimating increased net worth, looking at bank records, or estimating the raw materials used in manufacture. If you dispute their estimate, you must provide proof, which is difficult if adequate records are not kept. Failure to do so could result in having an assessment for additional taxes, plus penalties and interest.
Which records should I keep?
Retain documents that support deposits that do not reflect income (i.e. loan documents).
Important records to keep
- Records of income received
- Expense items, esp. work-related
- Home improvements, sales, refinances
- Investment purchases and sales information
- Basis of inherited property
- Specific uses of loan proceeds
- Medical expenses
- Charitable contributions
- Interest and taxes paid
- Records on nondeductible IRA contributions
For how long should I keep records?
The length of time you should keep your records is a matter of judgment and state and federal statutes of limitations. Audits on federal returns can occur for up to three (six if unreported) years after filing, so all records for tax deductions should be kept for at least that long, if not longer. Computer-maintained records and manually kept records have basically the same requirements.
Tax records should be kept year-round. Valuable deductions could be lost due to failure to list expenses on your return or having unsubstantiated items disallowed during an audit.
(Specific Tables: Business Record Retention Guide, Individual Record Retention Guide)
A Quick Summary:
- Records Retention Period
- Canceled Checks 7 years
- Credit Card Receipts 7 years
- Paid Invoices 7 years
- Bank Deposit Slips 7 years
- Bank Statements 7 years
- Tax Returns (uncomplicated) 7 years
- Tax Returns (all others) Permanent
- Employment Tax Returns 7 years
- Expense Records 7 years
- Entertainment Records 7 years
- Financial Statements Permanent
- Contracts Permanent
- Minutes of Meetings Life of company plus 7 years
- Corporate Stock Records Permanent
- Employee Records Period of employment plus 7 years
- Depreciation Schedules Life of assets plus 7 years
- Real Estate Records Permanent
- Journal & General Ledger Life of business plus 7 years
- Inventory records 7 years
- Home Improvement Records Ownership period plus 7 years
- Investment Records Ownership period plus 7 years
How should I keep records?
Tax records should be kept in a way that will give complete information on each item. It should answer questions such as How much? What for? When? Where? and Why? If it becomes too cumbersome to retain them all, consider microfilming.
Tip: Keep lists of records and documents and establish written schedules for when it is suitable to dispose of them.
What are some guidelines on taxes?
See our 2003 Pocket Tax Guide for further reference. Topics included are:
- Individual Income Tax Rates
- Regular Tax
- Alternative Minimum Tax (AMT)
- Standard Deduction
- Personal Exemptions
- 2003 Estimated Tax Payments
- Child Tax Credit
- Self-Employed Health Insurance Deduction
- Retirement Plan Contribution Limits
- Individual and Corporate Limitations
- Social Security Benefits
- Maximum Annual Earned Income Limit
- Taxable Social Security Benefits
- Estate and Gift Tax Rates
- 2003 Annual Gift Tax Exclusion
- Corporate Income Tax Rates
- Regular Tax
- Personal Service Corporations
- Alternative Minimum Tax (AMT)
- 2003 Estimated Tax Payments
- Employment Tax Rates
- FICA TAxes
- Self-Employment Tax
- Unemployment Tax
- Section 179 Deduction
- Standard Mileage Deductions
- Per Diem Rates
What is the deductible amount for business expenses?
In order to reduce the record-keeping burden for individuals and businesses, the IRS threshold for requiring receipts to substantiate deductions for travel and entertainment expenses is $75.
Remember, the IRS can deny any deduction automatically if you cannot provide documentation for expenses above this amount. Upon audit, you will be required to demonstrate the ordinary and business purpose of each expense. This can usually be achieved through the maintenance of a detailed diary showing the amount, date, location, business purpose, and relationship to the taxpayer of the person entertained for each expense.
Please refer to our Deductions for Travel and Entertainment Brochure for further information. You can download either the HTML or PDF(broken link).
What is the importance of classifying an individual as an employee or independent contractor?
Many business owners fail to recognize the effect of classifying an individual as an employee or an independent contractor. Properly classifying such a worker as an independent contractor saves payroll taxes but not necessarily workman’s compensation premiums. If, however, you have misclassified the individual, you could expose yourself to significant tax liability and penalties.
Classifying workers as employees requires that a company withhold federal, state, and local income taxes, pay half the tax mandated under the Federal Insurance Contribution Act (FICA), pay the full tax required under the Federal Unemployment Tax Act (FUTA) and state unemployment insurance tax laws, any workman’s compensation premiums, while also having to file a number of returns during the year with the various tax authorities, and finally, providing W-2s to all employees by January 31. In addition, employees may also have rights to any employee benefits such as vacations, holidays, health insurance, or retirement plans.
Clearly businesses prefer to classify workers as independent contractors to save money. The IRS prefers to classify workers as employees to collect payroll taxes.
How do I determine if an individual is an employee or an independent contractor?
Brown & Brown, P.C. works with many companies in trying to identify whether their workers are independent contractors or employees. We would be happy to work with you in making that identification. Alternatively, you can use Internal Revenue Service Form SS8 to request from the IRS a determination of status for a particular individual. This form asks for specific information that the IRS then uses with other information it gets from other sources to determine whether an individual is covered under the payroll tax laws. If you would like further information or if we can assist your organization, please call us.
The determination of whether a worker is an employer or an independent contractor rests primarily upon the extent that the employer has to direct and control the employee with regard to what and how an activity is to be accomplished. Generally, employers control how an employee performs a service. Independent contractors, on the other hand, determine for themselves how a given assignment is to be completed.
To aid business owners, the Internal Revenue Service has developed a 20-factor control test to be used as a guideline to indicate the extent and direction of control present in any employer, employee, independent contractor situation. This can be found here in HTML.