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How to Know Which Tax Records to Keep and Which to Throw Away

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Your last tax return was months ago and you don’t have to worry about filing again until next spring so you may be tempted to clean house and get rid of some of your old records that are taking up space. The guidelines that follow will help you decide which items can go and which should stay in your files.*.

Income and Expenses

Keep for at least three years after the date you file your return (or its due date, if later) the records proving your income and expenses, such as:

  • Form(s) W-2
  • Form(s) 1099
  • Form(s) K-1
  • Bank and brokerage statements
  • Canceled checks or other proof of payment

Three years is generally considered a minimum. If you can, consider keeping these items for six years, the IRS’s time limit for auditing a return when income is substantially understated and no fraud exists.

Investments

You’ll need your investment records to figure your gains and losses when you sell the investments. After you’ve sold an investment, continue to retain your records for as long as you keep the other items supporting the tax return on which you report the sale (three or six years). Investment records include statements showing when you purchased the investment, the purchase price, brokerage commissions, and any reinvested dividends.

Residence Purchases and Improvements

Hold on to closing statements and other paperwork related to the purchase of your principal residence for use when you eventually sell the home. Put records of any home improvements you’ve made in the file, too. While many homeowners won’t have a taxable gain when they sell their homes because of the $250,000 ($500,000 for married couples) exemption, special circumstances, such as renting out your home or having a home office, could result in a taxable profit.

Your Tax Returns

Maintain one or more permanent files with important personal documents, including your tax returns. If you don’t file a return, the IRS can assess tax at any time. You’ll need a copy of your return in case the IRS has no record of your filing.

Source/Disclaimer:
*This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. Contact your tax professional to discuss your personal situation.

Our Largo, FL CPA Firm can help. We offer individual and business tax preparation and tax planning services. We can also assist with IRS tax problems if they arise. Give us a call today at 727-544-1120!

What to do Before You Start Your Business

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Are you interested in starting a new business? Make sure you do plenty of research and have a firm business plan ready before you take the plunge. At Jackson and Associates CPA, PA we work with all types of new businesses to help simplify business formation. We can help with your incorporation or new business advisory needs. For now, here are some things to think about before you start your new business.

Making the Transition

If you have signed a non-compete or confidentiality agreement with your current employer, review it carefully to make sure it won’t hamper your startup efforts. If your new venture is in the same industry, be careful not to burn any bridges when you leave your current job. Scout out your opportunities. Buying a franchise or an existing business is much different than building a new business from the ground up.

Growing Your Business

Where will your customers come from? You may have one or two great prospects, but that may not be enough. Can you count on referrals from current business associates? Take a good hard look at opportunities for expansion that exist.

Figure Out Financing

Even with great prospects, it may take some time until cash starts coming in on a regular basis. Do you have enough of a financial cushion to get you through? If your spouse has an outside job, your spouse’s earnings and benefits may help provide stability during the startup period. If you need funding, where will it come from? Have you considered looking for a partner or investor?

Getting the Word Out

How much marketing and advertising will be required? Put together a comprehensive plan along with cost estimates. And, unless you’re familiar with the less traditional marketing and communication opportunities that today’s new media offer, you may want to enlist the help of someone who is.

Make a Budget

List every expense you can think of: rent, payroll (if any), phone and Internet service, computer equipment, website design, insurance, transportation costs, self-employment tax, etc. Then draw up a budget. Once your venture is up and running, you can use the budget as a guide in managing your finances.

Call us at 727-544-1120 today for more tips on how to ensure you’re following business best practices, and let us help you with your new venture.

How to Stay Ahead of Tax Issues in Your Business

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The last thing you need as a small business owner is to have to spend time unraveling tax problems you could have avoided. There are many tax issues that can trip up small business owners — here are a few.

Mixing Business and Personal

Keeping your personal bank and credit card accounts separate from your business accounts isn’t always easy. But “commingling” business and personal accounts creates a recordkeeping nightmare. When it’s tax time, you may not be able to identify all the appropriate business expenses. As a result, it could be difficult to accurately determine your business income and you might lose deductions.

Not Keeping Track

Keeping track of business expenses can be a challenge. However, you’ll need proof of purchase for any expenses you plan to deduct. Proof can be a canceled check (or legible image of the check) or a credit card, debit card, or electronic funds transfer (EFT) statement showing the payee, the amount of the purchase or transfer, and the transaction date.

You’ll also need an invoice or a receipt identifying the purchase. If the business purpose for the purchase isn’t immediately obvious, attaching a note of explanation or writing directly on the invoice or receipt can save time later should questions arise. There are specific substantiation requirements for business travel and entertainment expenses. Check with us if you have questions.

Making the IRS Wait

The employment taxes you collect should always be remitted to the IRS in a timely manner — without exception. As an employer, you’re responsible for withholding federal income tax and FICA (Social Security and Medicare) taxes from your employees’ wages and remitting them, along with your company’s FICA contributions, to the IRS. Penalties for noncompliance can be harsh.

Misclassifying Workers

Misclassifying workers as independent contractors when they are actually employees can be a thorny issue because they are treated differently for income-tax withholding and employment-tax purposes.

  • Employees: You must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes.
  • Independent contractors: You’re not required to withhold income tax, and the worker is fully liable for his or her own self-employment taxes. FICA and unemployment taxes do not apply.

It’s important to get it right to avoid penalties. Generally, the more control you have, the more likely it is that the worker is an employee.

Whether you need individual or business tax advice, give us a call. We’ve got the answers you’re looking for, so don’t wait. Call our Largo CPA Firm today at 727-544-1120.

Will your child have to pay taxes on the income earned at a summer job?

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It’s summer and you might have a child that working for the season for the first time. This new step is exciting for everyone but might have you wondering what the tax implications are. Will your child have to pay taxes on the income earned at a summer job? It’s important to know the guidelines and keep good records. At Jackson and Associates CPA, PA, we offer reliable tax advice and preparation. Here are a few guidelines to follow if you a child working this summer.

  • Tips from waitressing, etc., are considered taxable income.
  • Net earnings of $400 or more from self-employment (e.g., babysitting, lawn mowing) are subject to self-employment tax, in addition to income tax.
  • Your child may be taxed on unearned income (dividends and interest) from bank and investment accounts set up under your child’s Social Security number.
  • Your child can claim an exemption from federal income-tax withholding if he or she had no income-tax liability last year and doesn’t expect to owe income taxes this year.

When all is said and done, it’s better to not deal with tax issues on your own. Feel free to give our Largo, FL CPA Firm a call at 727-544-1120 to find out how we can provide you with the answers you need. Or, you can request a consultation online to learn how we can help with your tax questions.

7 Best Practices for QuickBooks Online

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Even if you’ve been using QuickBooks Online for a long time, it’s good to step back and evaluate your actions.

“Best practices” aren’t enforceable rules. They’re simply guidelines businesses commonly follow in one area or another. If you’re in retail, for example, one best practice might be to always ask customers checking out if they found everything they were looking for. This serves two purposes: It conveys a feeling of concern for the customer’s shopping experience, and it may also lead to increased sales.

QuickBooks Online has many best practices, some of which may serve multiple purposes, including these:

They keep your company data safe and clean.
They provide insight on your financial status.
They save time.
They can lead you to better relationships with customers and vendors.
Are any or all the following common practices for your business?

Reconcile accounts regularly.

One of QuickBooks Online’s most useful features is its ability to connect to your financial institution’s websites and download cleared transactions. QuickBooks Online also offers tools to help you keep your accounts reconciled online, like you used to do every month when your paper statement came. Reconciling accounts can help you uncover errors. It gives you a truer picture of your cash flow, and it improves the accuracy and timeliness of some reports.

It’s not a particularly pleasant process, but you should be reconciling your accounts regularly in QuickBooks Online. We can help.

Clean up your lists.

Some lists in QuickBooks Online aren’t overly long. You don’t have to worry about, for example, Payment Methods, Terms, or Classes. Your lists of customers and vendors, products, and services, on the other hand, can grow unwieldy over the years. This means it can take more time than it should to scroll through lists when you’re using those entities in transactions. It also puts unnecessary stress on your company file. If you can’t delete any, at least make them inactive.

Never leave QuickBooks Online open when you leave your work area.

This goes for everyone, even people who work alone and don’t access their company files away from their work areas. The obvious reason is to keep someone else from getting in and authorizing payments, for example, or otherwise compromising your financial information. It also protects the integrity of your data file in case your internet connection suffers some kind of outage.

Keep track of 1099 vendors.

Whether your company uses 10 vendors or a hundred or more, you may have to supply at least some of them with an IRS Form 1099 at about the same time you’re preparing W-2s for employees. Your 1099-related tasks will be much easier if those individuals and/or companies are earmarked. If you think vendors might need 1099s when you create their records in QuickBooks Online, click in the box to the left of Track payments for 1099 in the lower right corner. Not sure? Ask us.

Classify everything with care.

Every time you have to create a record or transaction where categories are involved (i.e., Classes, Customers and Vendors, Territories), check and double-check that you’ve assigned them the correct classification. Errors here can result not only in problems with daily workflow, but your reports will not be accurate. A related best practice: Create a meaningful group of Classes, and use them faithfully. They’ll help you make better business decisions.

To create your list of Classes, click the gear icon in the upper right and select All Lists | Classes | New.

View reports on a regular basis.

There are some advanced financial reports in QuickBooks Online that we should be creating for you on a regular basis, either monthly or quarterly. These include Profit and Loss, Balance Sheet, and Statement of Cash Flows. The mechanics of creating them aren’t difficult, but analyzing them is. You should be running reports on your own at frequencies that you think would be helpful, like A/R Aging Detail, Unpaid Bills, and Sales by Class Detail.

If you’ve been using QuickBooks Online for a while, you could probably come up with your own list of best practices. If you’re new to the site, consider scheduling some time with our Largo, FL CPA Firm to go over more of them. You can call us at 727-544-1120 or request a complimentary consultation online. Develop good habits from the start, and there won’t be nearly as much need for troubleshooting down the road.

Use Last Year’s Tax Form to find ways to Reduce Your Taxes in the Future

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It’s May. Your tax return has been filed. So what’s next? If you’re hoping to pay less tax in the future, your best move may be to go back to the drawing board. Using your last year’s return and what you tell us about your current financial picture as a guide, we can help you identify potential tax-reducing strategies for this year and beyond. Here are a few ideas to get you started.

Save for Retirement

Making pretax contributions to a 401(k) or 403(b) plan sponsored by your employer reduces the amount of your taxable wages — and the amount of income tax withheld from your paycheck. Your deferrals, along with earnings from investing the deferrals, are not taxable until the money is distributed to you.

As a 401(k), 403(b), or 457 plan participant, you may also have an opportunity to make after-tax “Roth” contributions. Making Roth contributions won’t save you taxes upfront. The advantage comes later, after a five-year period passes, beginning with the year you made your first Roth contribution. At that point, any Roth money distributed from the plan is tax-free, provided you are at least age 59½ or the distribution is made on account of your disability or death. So, qualifying earnings on your Roth contributions are never taxed.

Think Capital Gains and Dividends

Turning to non-retirement account investments, two types of earnings receive favorable tax treatment: long-term capital gains and qualifying dividends. Right now, the tax rate on both is capped at 20% (15% or 0% for those in a tax bracket below 39.6%). Because your regular tax bracket could be as high as 39.6%, there may be a substantial tax incentive to earn capital gains and dividends instead of fully taxed short-term gains and interest income. Of course, tax considerations are only one factor to consider in managing your investments.

Find Above-the-Line Deductions

On the expense side of the equation, certain expenses often referred to as “above-the-line” expenses, are deductible in arriving at your adjusted gross income rather than as itemized deductions. Some examples include:

  • alimony paid
  • student loan interest
  • moving expenses
  • self-employed health insurance

Limits apply. An above-the-line deduction not only lowers your taxable income, it can help you qualify for various other tax breaks.

A review of your tax situation this year may reveal additional opportunities to save taxes. When you’re ready to think taxes, think of us. We’ll be glad to help. At Jackson and Associates CPA, PA, we are Largo, FL Certified Public Accountants who build a strong relationship with our clients by working year-round to help them prepare for tax season. We constantly watch for changes to the tax regulations and develop new techniques to limit tax liabilities for both individuals and small businesses. Call us today at 727-544-1120 or request a free consultation online.