Larry Kopsa CPA
The following is an overview of the rules.
When determining how long to keep most of your income tax records, we look at the time frame over which the IRS can audit a return and assess a tax deficiency, or the time frame that you can file an amended return. For most taxpayers, this period is three years from the original due date of the return or the date the return is filed, if later. For example, if you file your 2005 Form 1040 on or before April 15, 2006, the IRS has until April 15, 2009 to audit the return and assess a deficiency. However, if a return includes a substantial understatement of income, which is defined as omitting income exceeding 25 percent of the amount reported on the return, the statute of limitations is extended to six years.
A good rule of thumb for keeping tax records is to add a year to the IRS statute of limitations period. Using this approach, you should keep your income tax records for a minimum of four years, but it may be more prudent to retain them for seven years, which is what the IRS informally recommends. State tax rules must also be considered, but holding records long enough for IRS purposes will normally suffice for federal and state tax purposes, assuming the federal and state returns were filed at the same time.
Certain tax records, however, should be kept much longer than described above and some should be kept indefinitely. Records substantiating the cost basis of property that could eventually be sold, such as investment property and business fixed assets, should be retained based on the record retention period for the year in which the property is sold. Tax returns, IRS and state audit reports, and business ledgers and financial statements are examples of the types of records you should normally retain indefinitely.
Keep in mind that there may be non-tax reasons to keep certain tax records beyond the time needed for tax purposes. This might include documents such as insurance policies, leases, real estate closing statements, employment records, and other legal documents.
It is also important to know that the IRS permits taxpayers to store certain tax documents electronically. Although the rules are aimed primarily at businesses and sole proprietors, they presumably apply to other individuals as well. The rules permit taxpayers to convert paper documents to electronic images and maintain only the electronic files. The paper documents can then be destroyed. Certain requirements must be met to take advantage of an electronic storage system, so contact us if you want more details.
The timetables listed above are the requirements for tax purposes. You should contact your attorney for additional guidance on record retention for legal purposes.
Larry Kopsa CPA
It is going to be a mess, but trust that we will keep you posted.
Larry Kopsa CPA
Remember the deduction for the contribution of old clothes or household items? Things will get trickier in 2007. Under the Pension Protection Act of 2006, you can't deduct charitable donations of clothes or household items (such as furnishings, electronics, appliances and linens) unless they're in "good" condition or better. Congress never defined "good," but I suspect my old socks and underwear are out. (Remember when Bill Clinton disclosed his tax return when he was president and he reported taking a donation for "used boxer shorts" at $4.50 per pair?)
Congress did give the IRS the power to issue regulations to deny a deduction for items with "minimal monetary value."
Even if an item is clearly "good," if you claim a value of more than $500, then you must include a qualified appraisal with your return. That's $500 for an item, not total.
Even if no item is valued at more than $500, if the sum of the non-cash contributions is more than $500, you will still have to file Form 8283 with the date of the contribution, the date acquired, your cost, the fair-market value, and the method used to determine the fair-market value. Special rules apply to contributions of cars, boats, and other items (such as art, jewelry, and collections) with a claimed value of more than $5,000.
Enter Rubin, at first a mere assistant to the president. Updating the Roosevelt view of Wall Street as a New Yorker cartoon, Rubin reminded Clinton that the rich create jobs. As Bob Woodward reported in ``The Agenda,'' Rubin at one point provided what could be termed the Great Reality Check of the 1990s, saying, ``Look, they're running the economy and they make the decisions about the economy. And so if you attack them you wind up hurting the economy and wind up hurting the president.''
Changed Direction
Aided by Republicans who gained control of the House and Senate in 1994, and egged on by Federal Reserve Chairman Alan Greenspan, Rubin proceeded to redirect the administration. He turned Clinton, who was, after all, a governor from Arkansas, into a bond-market expert who nattered on about basis points. By 1997, James Carville was uttering his famous quote about being reincarnated as the bond market, because then `you can intimidate everyone.''
Clinton gave up on health care. Rubin even pushed him into cutting the capital-gains rate to 20 percent, a level below that of the second half of the 1980s during the Reagan years.
Reality Check
The Rubin Reality Check was so powerful it affected both parties long after Clinton left the White House. Through Rubin, Democrats learned that expansive experimentation has a downside because of the fear it can generate. Through Rubin, Republicans were reminded that capital-gains-rate cuts can generate extra revenue. The economic-growth rate of the late 1990s, 4.1 percent on average, was something to brag about -- and still is. Protecting the economy from uncertainty was Rubin's hallmark. He even titled his 2004 memoir ``In an Uncertain World.''
Democrats today are back where they were when Begala, Carville and Reich were leading the transition team: bouncing with ambition to do something grand. But much more talk -- never mind laws -- about a big capital-gains increase will sock equities in the face, just like the mortgage crisis socked subprime and commercial paper in recent months.
Given the risks, experts advise home-based entrepreneurs to beef up their coverage by buying business insurance. There are three general types of policies available. The best choice depends on the size and nature of the enterprise.
First, there are endorsements, also known as riders. These are provisions added to your existing homeowner's policy that bolster the coverage to include your business. If you opt for this type of coverage, check whether it includes liability insurance for your business -- if not, you may need to purchase a separate liability policy. An endorsement usually doesn't offer a great deal of coverage, so it's probably best for businesses with a small amount of equipment and space that don't get visitors or deliveries at the home. A typical endorsement might cover $5,000 of contents and $1 million of liability for about $200 to $250 a year. That's on top of the homeowner's policy.
Secondly an in-home business-owner's policy combines coverage for the home and the business into a single contract, eliminating duplications and gaps in coverage. This type of policy, which generally starts at around $100 to $150 on top of the regular homeowner-policy costs, usually covers you for liability and loss of income. It's a good choice for businesses with limited risk exposure, but not if much of the business is conducted outside the home, because the policy covers only household activities and property.
Finally a business-owner's package policy is the most comprehensive type, and is more like a regular commercial policy than the other two options. It's completely separate from the homeowner's policy, and coverage usually includes liability on and off premises, business property, loss of income and injury.
This type of insurance will probably be best for home-based salons. This option could run about $250 to $500 a year, but may cost more depending on how risky your business is.
In summary, talk to you agent. Make sure that the agent knows everything about your business so that he or she can properly advise you.
Larry Kopsa CPA
