tax accounting Archives

How Long Should You Keep Your Tax Records?

My mom showed me an old tax return filed the year I was born. It was for tax year 1957 filed in 1958. There wasn’t much to the return, but the one thing that caught my attention was a receipt for a medical deduction that my dad had kept with the return…a vasectomy. (Was I really that bad?)

I don’t recommend you necessarily keep tax receipts for the rest of your life, but here are some tips provided in part by the IRS:

• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return. (Of course there is a statute of limitation rule that eliminates any refund if you file too late.)
• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductions you claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property. This may also support your depreciation deduction which have a life much greater than a normal deduction.
• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.
• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.
• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file. We recommend using a paperless system for most records that can be attached to your accounting software. This method saves space and keeps the supporting tax documents at your fingertips.

Looking for help with all this, contact yours truly, The LA CPA!

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Home Office Tax Deduction Simplification: Sort of…

I cook at home. A few times on my birthday my wife would present me with a cooking class at Laguna Beach, California. At one of these events, I recall the chef asking us to separate the whites from the yolks of several eggs. A couple of people cracked the eggs in half and tossed the yolk back and forth until all of the whites had fallen into the bowl leaving the yolks in the shells. This of course took a couple of minutes for each egg.

After watching, the chef said, “No, I’ll show you how to do this quickly.” He then cracked an egg in his hand letting the whites run through his fingers into a bowl for about five seconds and threw the yolk into another bowl. “That’s how it is done,” he scowled. “Simplified!”

If you were ever audited for taking a home in office deduction, you my have found some broken shells in your deduction. I recall an audit of a screenwriter. The auditor challenged me on the details of the deduction. I told her the screen writer wrote a successful Disney cartoon from that office. That auditor said her kids loved the movie, and allowed the deduction.

If you want to simplify your home office deduction, look at this safe harbor from the IRS web site:

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014.

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A CPA’s P.O.P. and the Independent Contractor House of Mirrors

Have you ever heard of Pacific Ocean Park? (P.O.P. as we kids used to call it). I grew up in Los Angeles during the 1960s and would go down to that amusement park in Santa Monica. It was a real old fashioned park consisting of a fun house, house of mirrors, fortune tellers, etc. One of my favorites was the house of mirrors. My cousin, Bill and I would always try to figure out a system on navigating through it. We had no directions, or secret knowledge, so we had to wing it.

Such is the case with employers and their independent contractors. It seems that every new client I obtained had the same dilemma, what was an employee? Technically, each state defines what an employee is and the IRS is required to use their definitions in their determination. However, the IRS has published guidelines that you may want to use:

IRS 20 Factors and 3 Categories of Control

Revenue Ruling 87-41: The Twenty Factors

To help determine whether a worker is an employee under the common law rules, the IRS identified 20 factors that may indicate whether the employer can exercise enough control to establish an employer-employee relationship. These factors, set forth in Revenue Ruling 87-41, were based on the circumstances that the courts identified and relied upon to decide whether an employment relationship existed. Not all the factors must be present to find an employee/employment relationship, but the factors are guides to use to assess the likelihood as to whether an individual is an employee or an independent contractor.

(1) Instructions. An employee must comply with instructions about when, where and how to work. The control factor is present if the employer has the right to require compliance with the instructions.

(2) Training. An employee receives on-going training from, or at the direction of, the employer.

Independent contractors use their own methods and receive no training from the purchasers of their services.

(3) Integration. An employee’s services are integrated into the business operations because the services are important to the business. This shows that the worker is subject to direction and control of the employer.

(4) Services rendered personally. If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees, an independent contractor may assign the work to others.

(5) Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee. An independent contractor hires, supervises and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

(6) Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists. The IRS has found that a continuing relationship may exist where work is performed at frequently recurring intervals, even if the intervals are irregular.

(7) Set hours of work. A worker who has set hours of work established by an employer is generally an employee. An independent contractor sets his/her own schedule.

(8) Full time required. An employee normally works full time for an employer. An independent contractor is free to work when and for whom he or she chooses.

(9) Work done on premises. Work performed on the premises of the employer for whom the services are performed suggests employer control, and therefore, the worker may be an employee. Independent Contractor may perform the work wherever they desire as long as the contract requirements are performed.

(10) Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee. Independent Contractor performs the work in whatever order or sequence they may desire.

(11) Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicates a degree of control by the employer.

(12) Payments by hour, week or month. Payments by the hour, week or month generally point to an employer-employee relationship.

(13) Payment of expenses. If the employer ordinarily pays the worker’s business and/or travel expenses, the worker is ordinarily an employee.

(14) Furnishing of tools and materials. If the employer furnishes significant tools, materials and other equipment by an employer, the worker is generally an employee.

(15) Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.

(16) Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor. Employees are typically paid for their time and labor and have no liability for business expenses.

(17) Working for more than one firm at a time. If a worker performs services for a multiple of unrelated firms at the same time, the worker may be an independent contractor.

(18) Making services available to the general public. If a worker makes his or her services available to the general public on a regular and consistent basis, the worker may be an independent contractor.

(19) Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee.

(20) Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.

Three Categories of Control Factors

Over the years, the Internal Revenue Service recognized changes in business practices and therefore created three categories of factors to assess the degree of control and independence. These factors are to be used in conjunction with the 20 Factors.

(1) Behavioral Control – Includes the type of instructions the business gives to the worker, such as when and where to do the work, and the training the business provides to the worker. The key consideration is whether the business has retained the right to control the details of the worker’s performance or has relinquished that right

(2) Financial Control – Address the business’s right to control the business aspects of the worker’s job.

(3) Relationship Of Parties – The nature of the relationship may be evidenced by:

_ a written contract;

_ the benefits the business provides to an employee, such as paid vacation and health coverage;

_ the permanency of the position; and

_ the extent to which the services performed are a key aspect of the regular business of the company

Copy these down and implement them in your tax planning. It could save you a bundle of tax penalties. However, all tax situations are different, so consult a tax advisor before acting.

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Informed Giving: Even in Tough Times, Non-Profit Organizations Need You

For over three decades I have experienced charitable giving on several levels: 1) Like most people, I support those organizations that are dear to me, 2) I have sat or sit on non-profit boards, usually as Treasurer, but occasionally President., 3) As a CPA, I have obviously counselled people on their contributions, the most of exciting of those was a donation of a Picasso.

But, in order to donate correctly, you should follow the rules set out by the tax code and the IRS:
1. Tax-exempt status. Contributions must be made to
qualified charitable organizations to be deductible. Ask the charity about its
tax-exempt status, or look for it on IRS.gov in the Exempt Organizations Select
Check, an online search tool that allows users to select an exempt organization
and check certain information about its federal tax status as well as
information about tax forms an organization may file that are available for public
review. This search tool can also be used to find which charities have had
their exempt status automatically revoked. Don’t hand out cash to street vendors unless you are sure they represent a legitimate company.

2. Itemizing. Charitable contributions are deductible
only if you itemize deductions using Form 1040, Schedule A. A real bummer for those who are not wealthy enough to own a home, or have other deductions that qualify them.

3. Fair market value. Cash contributions and the fair
market value of most property you donate to a qualified organization are
usually deductible. Special rules apply to several types of donated property,
including cars, boats, clothing and household items. If you receive something
in return for your donation, such as merchandise, goods, services, admission to
a charity banquet or sporting event only the amount exceeding the fair market
value of the benefit received can be deducted.

4. Records to keep. You should keep good records of
any donation you make, regardless of the amount. All cash contributions must be
documented to be deductible – even donations of small amounts. A cancelled
check, bank or credit card statement, payroll deduction record or a written
statement from the charity that includes the charity’s name, contribution date
and amount usually fulfill this record-keeping requirement. When donating things like clothes, take pictures, itemize, and always get a receipt.

5. Large donations. All contributions valued at $250
and above require additional documentation to be deductible. For these, you
should receive a written statement from the charity acknowledging your
donation. The statement should specify the amount of cash donated and/or
provide a description and fair market value of the property donated. It should
also say whether the charity provided any goods or services in exchange for
your donation. If you donate non-cash items valued at $500 or more, you must
also complete a Form 8283, Noncash Charitable Contributions, and attach the
form to your return. If you claim a contribution of noncash property worth more
than $5,000, you typically must obtain a property appraisal and attach it to
your return along with Form 8283. Obviously, I had to obtain a written appraisal of the Picasso, and fill out the form.

Don’t wait until December 31 to figure this out. Collect your donation receipts in a big envelope throughout the year. Then, match them to your checks and credit cards.

6. Timing. If you pledge to donate to a qualified
charity, keep in mind that for most taxpayers contributions are only deductible
in the tax year they are actually made. For example, if you pledged $500 in
September but paid the charity just $200 by Dec. 31 of that same year, only
$200 of the pledged amount may qualify as tax-deductible for that tax year.
End-of-year donations by check or credit card usually qualify as tax-deductible
for that tax year, even though you may not pay the credit card bill or have
your bank account debited until after Dec. 31.

For more information, see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property.

Source: IRS

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You May Be Able to Deduct the Cost of Working for a New Violent Psychopath

When I was a teen, I landed a job installing car stereos. It was the coolest job on earth because I was trained, paid well, and eventually had the best possible stereo system in my car at a wholesale cost. Never mind the fact that I was working for a “violent psychopath.”

If you are looking for a job, here are some tips:

1. To qualify for a deduction, your expenses must be spent on a job
search in your current occupation. You may not deduct expenses you incur while
looking for a job in a new occupation. So, if you are an engineer looking for a job as a nurse, forget the deduction. But, if you are an ER nurse looking for a job as a surgical nurse, you may have a deduction.

2. You can deduct employment and outplacement agency fees you pay while
looking for a job in your present occupation. If your employer pays you back in
a later year for employment agency fees, you must include the amount you
received in your gross income, up to the amount of your tax benefit in the
earlier year.

3. You can deduct amounts you spend for preparing and mailing copies of
your resume to prospective employers as long as you are looking for a new job
in your present occupation. This expense isn’t as costly as in previous generations since so many use E-mail to send resumes.

4. If you travel to look for a new job in your present occupation, you
may be able to deduct travel expenses to and from the area to which you
travelled. You can only deduct the travel expenses if the trip is primarily to
look for a new job. The amount of time you spend on personal activity unrelated
to your job search compared to the amount of time you spend looking for work is
important in determining whether the trip is primarily personal or is primarily
to look for a new job.

5. You cannot deduct your job search expenses if there was a
substantial break between the end of your last job and the time you begin
looking for a new one. This is a tough call. Consult your tax advisor.

6. You cannot deduct job search expenses if you are looking for a job
for the first time. If you are just starting out, ignore this article.

7. The amount of job search expenses that you can claim is limited. To
determine your deduction, use Schedule A, Itemized Deductions. Job search
expenses are claimed as a miscellaneous itemized deduction and the total of all
miscellaneous deductions must be more than two percent of your adjusted gross income.

8. When you do land a new job, don’t forget about the possible deduction for costs in relocating and moving.

As, always, each tax situation can be different. So, consult your tax advisor before making any decisions.

For more information about job search expenses,
see IRS Publication 529, Miscellaneous Deductions.

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The Band “Kiss” FaceBook and Twitter Strategy Case Study…Old School

Chances are, if you are reading this article, it is because you found the link on a social network like Facebook and Twitter. However, the strategy dicussed in the following article will probably be obsolete within a year…bummer. Music Think Tank published a cool article How to use Facebook and Twitter on your Official Website using “Kiss” as their case study in using such social networks.

However, there is a major point that I disagree in the author’s strategy. He set up Kiss’s Facebook with the idea to bring everyone back to Kiss’s web page. That is old school. Today, if you want to impress people with your skills and knowledge, you link everything to your BLOG. And that blog should be a page on your web site.

Why? You link people to your blog to demonstrate your knowledge in a specific area. Web pages are stagnant and not very interesting. Blogs are dynamic and informative. Secondly, just as I am trying to demonstrate in this blog, the blog topic should give the user free information.

Now, maybe a band, or an artist may not have anything to write in a blog, and their official web site is good enough. But not for the rest of us. You are an expert in something. Share it with others and build relationships.