Storing tax records: How long is long enough?
April 15 has come and gone and another year of tax forms and shoeboxes full of receipts is behind us. But what should be done with those documents after your check or refund request is in the mail?
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), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.
Business Documents To Keep For One Year
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
Bank Statements and Reconciliation's
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
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 Agents’ 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 Document 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)
Property Records / Improvement Receipts
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
Investment Trade Confirmations
Retirement and Pension Records
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)
Property Records / improvement receipts (keep until property sold)
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)
Monday, April 13, 2009
Tuesday, April 7, 2009
Deductible Business Expenses
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
The expenses used to figure the cost of goods sold,
Capital Expenses, and
Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold:
The cost of product or raw materials, including freight
Storage
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products)
Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
Business start-up cost (See the note below)
Business assets
Improvements
Note: You can elect to deduct or amortize certain business start-up costs.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses
Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Source: Internal Revenue Service
What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
The expenses used to figure the cost of goods sold,
Capital Expenses, and
Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold:
The cost of product or raw materials, including freight
Storage
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products)
Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
Business start-up cost (See the note below)
Business assets
Improvements
Note: You can elect to deduct or amortize certain business start-up costs.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses
Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Source: Internal Revenue Service
Subscribe to:
Posts (Atom)
