IRS Offers New Cash Payment Option

IRS Offers New Cash Payment Option
The Internal Revenue Service recently announced a new payment option for individual taxpayers who need to pay their taxes with cash. In partnership with ACI Worldwide's OfficialPayments.com and the PayNearMe Company, individuals can now make a payment without the need of a bank account or credit card at over 7,000 7-Eleven stores nationwide.

"We continue to look for new ways to provide services for our taxpayers. Taxpayers have many options to pay their tax bills by direct debit, a check or a credit card, but this provides a new way for people who can only pay their taxes in cash without having to travel to an IRS Taxpayer Assistance Center," said IRS Commissioner John Koskinen.

Individuals wishing to take advantage of this payment option should visit the IRS.gov paymentspage, select the cash option in the other ways you can pay section and follow the instructions:

• Taxpayers will receive an email from OfficialPayments.com confirming their information.
• Once the IRS has verified the information, PayNearMe sends the taxpayer an email with a link to the payment code and instructions.
• Individuals may print the payment code provided or send it to their smart phone, along with a list of the closest 7-Eleven stores.
• The retail store provides a receipt after accepting the cash and the payment usually posts to the taxpayer's account within two business days.
• There is a $1,000 payment limit per day and a $3.99 fee per payment.

Because PayNearMe involves a three-step process, the IRS urges taxpayers choosing this option to start the process well ahead of the tax deadline to avoid interest and penalty charges.

The IRS has been partnering with Official Payments since 1999 for taxpayers wanting to use a credit card to pay taxes.

In this new option, PayNearMe is currently available at participating 7-Eleven stores in 34 states. Most stores are open 24 hours a day, seven days a week,. For details about PayNearMe, the IRS offers a list of frequently asked questions on IRS.gov.

The IRS reminds individuals without the need to pay in cash that IRS Direct Pay offers the fastest and easiest way to pay the taxes they owe. Available at IRS.gov/Payments/Direct-Pay, this free, secure online tool allows taxpayers to pay their income tax directly from a checking or savings account without any fees or pre-registration.
Click here for more information about the new IRS payment option.

Who is this guy named FICA?

Who is this guy named FICA?
FICA is the acronym for Federal Insurance Contributions Act. The acronym is often used in the US when referring to the combination of the Social Security tax and the Medicare tax.

Generally, all of an employee's earnings which are less than $117,000 in the calendar year 2014 are subject to payroll withholdings of 6.2% for the Social Security tax plus 1.45% for the Medicare tax. In addition, the employer is required to pay a similar amount. The result is that the employer must remit 15.3% (6.2% + 6.2% + 1.45% + 1.45%) of each employee's wages or salaries that are less than $117,000 in a year.  

A self-employed person must pay both the employee portion and the employer portion of the FICA tax.

There are specific rates that apply to an employee's annual earnings in excess of the FICA wage limit ($117,000 in 2014).

Additional Medicare Tax

Effective in 2013, the Additional Medicare Tax of 0.9% applies to earned income of more than $200,000 ($250,000 for married couples filing jointly). Employers withhold this tax on wages in excess of $200,000 regardless of an employee’s filing status.

The Additional Medicare Tax raised an individual wage earner’s portion on compensation above the threshold amounts to 2.35 percent from 1.45 percent; the employer-paid portion of the Medicare tax on these amounts remained at 1.45 percent. 

Net Investment Income Tax

Net Investment Income Tax is separate from the new Additional Medicare Tax, which also went into effect on January 1, 2013. You may be subject to both taxes, but not on the same type of income. The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation, and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.

In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.

Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.

Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes. To the extent the gain is excluded from gross income for regular income tax purposes, it is not subject to the Net Investment Income Tax.

If an individual has too little withholding or fails to pay enough quarterly estimated taxes to also cover the Net Investment Income Tax, the individual may be subject to an estimated tax penalty.

Social Security Cost-of-Living-Adjustment
Publication 15 (2014), (Circular E), Employer's Tax Guide

Spring Cleaning: What Financial Records to Keep and What to Throw Away

Spring Cleaning: What Financial Records to Keep and What to Throw Away

When it comes to financial papers, an approach of “better safe than sorry” can lead to a whole lot of clutter. Tax season is coming to a close, and spring is upon us; it’s time to rummage through those mounds of financial records and other important documents and determine what financial records to keep and what can go.

Here is a quick overview of how long you should keep those important documents:
Safe to Dispose of (optionally, keep permanently):

• Bank Deposit Slips (after reconciling statements)
• Certificates of Deposit (after maturity)
• Loan Documents (when repaid)
• Term life Policies (after term expires)
• Savings Bonds (after maturity)
• Car Title (when car sold)
• Warranties (after expiration)

Keep Permanently:

• Birth Certificate
• Death Certificates
• Marriage License
• Military Discharge Papers
• Social Security Card
• Loan Discharge Notices
• Employer Defined-Benefit Communications
• Permanent Life Policies
• IRA Contribution Records

Keep for One Year:

• Canceled Checks (7 years if needed to support tax filings)
• Check Registers
• Check Statements
• Credit Card Statements (7 years if needed to support tax filings)
• Pay Stubs

Keep for Seven Years:

• Brokerage Statements (after securities sold)
• Receipts (if needed to support tax filings)
• Purchase Confirmations and 1099s (after securities sold)
• Tax Returns and Supporting Documents
• Paperwork on Charitable Donations
• Investment and Real Estate Records (after you sell)
• Bank Statements

Keep Indefinitely:

• W-2 Wage and Tax Statement (until you start receiving social security)
• Receipts for Big Ticket Items

When You Receive a New One:

• 401k Statements
• Social Security Statements
• Bills for Non-Deductible Items
• Insurance Policies

Dispose of Old Copy When Updated:

• Health-Care Proxy
• Living Trust
• Living Will
• Power of Attorney
• Will
• Insurance Inventory

Every household must work out it’s own records management system, but some general guidelines can help. This is not necessarily a fully comprehensive list. However, it gives an idea of what can go and when. If you are confused or unsure about a document it’s best to check with your accountant before disposing of it.

This information was provided by:
Mary Ellen Hall EA
Rauker, Scheinfeldt & Company, Inc.
Auburn, MA
Phone - 508-832-4085
Email - Mary Ellen
Website - Rauker, Scheinfeldt

Courtesy:  My Senior Portal

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• Paperwork necessary to file your income taxes? 
• What should you keep? 
• Here is a checklist of some common items needed at tax time:

Income

• W-2s 
• 1099s for miscellaneous income 
• Proof of alimony 
• Interest and dividend income statements 
• Social Security (1099-SSA) and pension income statements 
• Retirement plan distributions (1099-R) for contributions, distributions, & rollovers 
• Brokerage statements (1099-B) 
• Profit/loss K-1 statements from partnerships, trusts, and small business 
• Proof of other income (jury duty, child support, etc.) 
• Income/expense from rental properties, self-employment, and hobbies 

Deductions

• Mortgage Interest (1098) 
• Real estate tax documents 
• Expenses: moving, education, child-care, mortgage and student interest, IRA contributions 
• Charitable donations (cash and non-cash) receipts 
• Health care expenses 
• Casualty and theft loss documentation 
• Un-reimbursed employee expenses 
• Receipts for qualified energy efficiency purchases 
• Documents for the purchase, sale, or refinance of your home 
• Motor vehicle registration receipts 
• Gambling profit and losses documentation 
• Mileage logs for business, moving, medical, and charitable travel 
• Job related expenses 
• Tuition payments (1098-T) 

Other

• Cost information for any investment or property sale 
• Full information on any dependents (DOB, age, any income, etc.) 
• Education information for all qualifying family members 
• Review all checking account and credit card statements for deductions 
• Identify any estimated tax payments made during the year 
• Copies of any tax refunds 
• Year-end payroll check stub 
• Recap of any gifts received or given in excess of $14,000

A Taxpayer Bill of Rights? The Taxpayer Advocate proposes a list of rights — and responsibilities

A Taxpayer Bill of Rights?

The Taxpayer Advocate proposes a list of rights and responsibilities.

In her January 2014 report to Congress, National Taxpayer Advocate Nina Olson proposed a Taxpayer Bill of Rights, saying that many taxpayers aren’t aware of the rights they already have. A clear-cut expression of those rights, she suggested, would encourage compliance with the tax laws and help restore taxpayers’ faith in the system, which has been shaken by recent scandals at the IRS. 

Taking the Bill of Rights as her model, Olson proposed a list of 10 taxpayer rights that should be formally acknowledged -- and then added a list of five taxpayer responsibilities, including our personal favorite: The Responsibility to Be Courteous (to IRS personnel, that is).

1. The Right to Be Informed
Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the law and IRS procedures in all tax forms, instructions, publications, notices and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.

2. The Right to Quality Service

Taxpayers have the right to receive prompt, courteous and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to have a way to file complaints about inadequate service.

3. The Right to Pay No More than the Correct Amount of Tax
Taxpayers have the right to pay only the amount of tax legally due and to have the IRS apply all tax payments properly.

4. The Right to Challenge the IRS’s Position and Be Heard
Taxpayers have the right to raise objections and provide additional documentation in response to IRS actions or proposed actions, to expect that the IRS will consider their objections and documentation promptly and impartially, and to receive a written response if the IRS finds them insufficient.

5. The Right to Appeal an IRS Decision in an Independent Forum
Taxpayers are entitled to a prompt and impartial administrative appeal of IRS actions and have the right to receive a written response explaining the Appeals Division’s decision. Taxpayers generally have the right to take their cases to court to challenge an adverse final determination.

6. The Right to Finality
Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year. Taxpayers have the right to know when the IRS has finished an audit.

7. The Right to Privacy
Taxpayers have the right to expect that any IRS inquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and a collection due process hearing where applicable.

8. The Right to Confidentiality
Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect the IRS to investigate and take appropriate action against its employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

9. The Right to Retain Representation
Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to be told that if they cannot afford to hire a representative they may be eligible for assistance from a Low Income Taxpayer Clinic.

10. The Right to a Fair and Just Tax System, Including Access to the Taxpayer Advocate Service
Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

Five Taxpayer Responsibilities
1. The Responsibility to Be Honest
Taxpayers have the responsibility to be truthful in preparing their tax returns and in all other dealings with the IRS.

2. The Responsibility to Provide Accurate Information
Taxpayers have the responsibility to answer all relevant questions completely and honestly, to provide all required information on a timely basis, and to explain all relevant facts and circumstances when seeking guidance from the IRS.

3. The Responsibility to Keep Records
Taxpayers have the responsibility to maintain adequate books and records to fulfill their tax obligations, preserve them during the time they may be subject to IRS inspection, and provide the IRS with access to those books and records when asked so the IRS can examine their tax liabilities to the extent required by law.

4. The Responsibility to Pay Taxes on Time
Taxpayers have the responsibility to pay the full amount of taxes they owe by the due date and to pay any legally correct additional assessments in full. If they cannot pay in full, they have the responsibility to comply with all terms of any full or partial payment plans the IRS agrees to accept.

5. The Responsibility to Be Courteous
Taxpayers have the responsibility to treat IRS personnel politely and with respect.

Landlord Tax Advice

Landlord Tax Advice
Landlords can calculate how much tax they have to pay by adding the rent money they receive to any other taxable income they earn.  The rate of tax they have to pay depends on what their overall income (salary plus rent) is for the tax year, minus any deductible expenses.  The expenses landlords can offset against their tax liability for rental income include:

• Interest payments on a mortgage.
• Repair and maintenance – e.g. plumbing and gardening
• Wear and tear – if a property is furnished, cost of appliances and fixtures
• Depreciation - straight line: residential building 27.5 years; commercial building 39 years 
• Energy efficiency investments - tax credits
• Property taxes
• Fees and bills – e.g. utility bills, landlord insurance, and rental agency fees
• Other related costs – e.g. advertising the property

If you really want to make life easier, ensuring good record keeping is key. Keep all receipts, no matter how small, they all add up.  Most importantly, set up a separate bank account so you can track what is going in and what is going out via your bank statements.  

We advise landlords to create a spreadsheet to record all of their incomings and outgoings.  When the time comes to filling out a tax return, this spreadsheet will make the process a lot easier, further down the line.

Keeping Business Tax Records

Keeping Business Tax Records
The period of time a business must keep records and the types of records required varies according to the statutory requirements of the particular government or agency involved.  The five main federal agencies are:  Internal Revenue Service, US Department of Labor, Wage and Hour Division, Immigration and Naturalization, Social Security Administration, and Equal Employment Opportunity Commission.  In addition, there may be selective state agencies that have their own particular requirements. However, the tendency is such that the federal agencies usually have more stringent requirements, so we will focus on them.

Keep in mind, however, that various civil and criminal actions brought against a business do not always follow these statutory time requirements.  That means nothing short of saving every scrap of business paper and record forever will absolutely provide a buffer from any and all challenges.  Nevertheless, the majority of situations do tend to follow government agency time requirements.  Since most businesses cannot possibly retain every document forever, they therefore choose to follow the federal agency requirements instead.

Before suggestions are made as to how long to keep different types of business records for income tax purposes, a brief synopsis of each of the major federal agencies and what they cover is in order.
Here's a quick rundown:

Internal Revenue Service:  This agency is the most well-known.  It handles all pertinent matters relating to federal income and estate tax returns.  Thus, any information filed on any of these types of returns must be retained for the IRS statutory period which will be detailed shortly.

US Department of Labor:  Employee wage matters, working conditions, ERISA rules, and other personnel matters fall under the jurisdiction of this agency.  Normal time requirements for retaining these types of records is 3 years.

Immigration and Naturalization:  This agency oversees the employment rules and regulations concerning the use of non US citizens, and verification of work eligibility.  The business must retain the I-9 employment verification form and employee records for 3 years after the date of hire.

Social Security Administration:  The business records for employee's earnings as they relate to social benefits available from this agency are regulated here. The statutory period is generally 3 years beyond the year of payment to employees and/or filing of appropriate returns.

Equal Employment Opportunity Commission:  The EEOC handles personnel matters as they apply to employee's rights on the job.  Thus, the personnel file related to these matters (such as pay rates, terminations, promotions, harassment complaints, etc.) should be kept for at least 3 years from the date of an employee's termination.

Since the biggest concern for most businesses is what the IRS requires for specific types of records, detailed below is a suggested breakout of the type of record, and the minimum time to retain them.

Please be advised that the normal statute of limitations is being used.  It may be longer in the situation where income or expenses are being distorted, such that it materially affects your tax liability (usually by 25% or more).  In that case, the period is 6 years.  Similarly, if fraud is involved, or failure to file, the statute of limitations doesn't expire.

Tips On Physically Keeping Records
First, wherever possible, try to have duplicates of records in two separate physical locations to avoid loss due to catastrophe like fire or flood.  If this isn't possible or practical, try to keep them safe from these possibilities in a fire proof or flood proof environment.  At the very least, protect the permanent or quasi permanent records such as contracts, insurance policies, real estate records, etc.

In case of IRS audit, the required proof for deductions can be both the cancelled checks and invoices, so save both, not just one.  This is especially true if payments were made to individuals, not businesses or corporations.  Without an invoice, the IRS could conceivably deny the deduction by taking the position that a check made out to an individual is a gift, hence not deductible.

You should always make sure someone you trust knows where all the important records, papers, keys, and necessary releases are located should something happen to you.

Hopefully, this will provide you with some guidance.  If you are ever in doubt as to how long to keep any specific record for tax purposes, it is always a good idea to check with your tax professional first before tossing it.  A good rule is: When in doubt, don't throw it out.

HOLDING PERIOD FOR VARIOUS TYPES OF RECORDS

ITEM	HOLDING PERIOD FROM FILING DATE
Tax Returns	Permanent
Cancelled Checks	3 years
Bank Deposit Slips	3 years
Bank Statements	6 years
Travel & Entertainment Reports	3 years
W-2's, 1099's, 1098's	6 years
Proof Of Tax Return Deductions	6 years
Credit Card Slips, Statements, Journals, Ledgers	3 years
Inventory Records	6 years
Minutes Of Meetings	Life Of Organization
Depreciation Schedules	Life Of Organization
Sales, Purchase Invoices	6 years
Corporate Stock Records	Permanent
Financial Statements	6 years
Retirement Account Information	Permanent
Employee Payroll Records	3 years beyond the year of termination of employee
Financial/Insurance Contracts	6 years beyond final year of contract

Capital             Expenditures/ Improvements	3 years beyond final year property is disposed of
Security Sales/Purchase Slips	3 years beyond the year the asset was sold
Closing Papers  On Properties	3 years beyond the year the property is sold

Reference:  Practice Enhancers, Able & Co.              

Bookkeeping & Accounting Issues

Bookkeeping & Accounting Issues
A business that is either just starting out or undergoing a significant growth stage must deal with four main issues in regard to recordkeeping: the use of the most appropriate "tax year;" whether to use a cash vs accrual method of accounting; maintaining a good recordkeeping/bookkeeping system; and, having a working knowledge of the major IRS reporting requirements for various payments.

The right decisions in these matters help increase the chance of business survival and of maximizing business profits.  In addition, it can make matters much easier in dealing with such groups as the IRS, your state tax authority, an insurance carrier, outside investors, and accountants.  This can save you time, aggravation, and money.

Use of the Most Appropriate Business Tax Year
A business may be required to choose between two different tax year periods: a Calendar Year or a Fiscal Year.  A calendar year is one which ends on December 31.  A normal fiscal year consists of 12 consecutive months ending in a month other than December.  The business must establish which of these two options it will use for its operational life.

Why would a fiscal year be chosen?  Many businesses use a fiscal year to match the business cycle–take advantage of the highs or lows.  Others do it for convenience of recordkeeping.  Getting information ready for doing taxes or financial reports can be time consuming, so a fiscal year that ends during a lull period gives the owners a more efficient time frame to do the recordkeeping activities.  Businesses where inventory(and inventory-taking) is a big factor frequently elect fiscal years.

Similarly, businesses where the cash flow may differ from a calendar year period may decide on a fiscal year so money will be available to pay any required income taxes.  In brief, a fiscal year may be more beneficial than a calendar year for a business where the preferred operating or income cycles end other than December 31.

From an income tax reporting standpoint, there are some business types that are either limited in the choice, or must make a special application to get permission to use a specific choice.  This is due to the so-called "default" issues related to certain types of  entities in which they are restricted in their selection.

In this regard, businesses that are either sole proprietorships, partnerships, or special subchapter S corporations must generally use a calendar year for income tax filing purposes.  Regular C-type corporations can usually elect either calendar or fiscal without any restrictions, unless they fall under the classification of a "personal service corporation." In that case, a calendar year would also become the required default choice.  A personal service corporation is one in which the principal activity consists of personal services done by owner/employees.

There are ways in which a business may still be able to qualify for a fiscal year selection instead of a required calendar year.  The IRS may grant special permission to use other than the required tax year if the business can prove it has a definite "Business purpose" for another tax period.
For instance, a business that is highly "seasonal" in nature where the main activities have monthly "peaks and valleys" that do not end on December 31 would be a good candidate.  A tax preparation business where April is the dominant month is a good example; certain farming related businesses also fall into this category.

Other determining areas might be such things as the use of a fiscal year due to employee hiring patterns, consumer buying patterns(swimming pools, boats, etc.), regulatory purposes, or model year changes, to name a few.  Reasons that CANNOT be used to get out of using a required tax year revolve around a business purpose that causes a significant shift in income or deductions such that it reduces potential tax liability.

Another way for certain business types to use a tax year different from a required tax year is to make a Section 444 Election.  This is done by filing IRS Form 8716, "Election To Have A Tax Year Other Than A Required Tax Year." This may work for partnerships, personal service corporations, and subchapter S corporations where the "business purpose" test doesn't apply.  This involves meeting various deferral period requirements and possibly making a payment if there are any calculated tax benefits from this deferral into a fiscal year.

Change In Tax Year: If you decide to try to change an existing tax year, an IRS Form 1128, "Application To Adopt, Change, Or Retain A Tax Year" must be filed.  This is due before the 15th day of the second calendar month following the close of the prior tax year.

Cash Vs Accrual Accounting Methods
Under IRS definition, an accounting method is a set of rules used to determine when and how income and expenses are reported.  Normally for IRS purposes, the accounting method–cash vs accrual–is chosen before you file the first business income tax return.  It must then be used on a consistent basis for the life of the business, unless changes in the business occur that statutorily necessitate a change in the accounting method.  If you wish to change methods for particular reasons of your own, you must get written permission from the IRS.

Normally, you calculate your income and expenses by using three major methods: 1) Cash Method; 2) Accrual Method; or, 3) Hybrid Method in which select elements of cash and accrual are combined.

Cash Method 
This is used by most sole proprietorships, and many businesses where inventory is not a major factor.  In this method, income is reported when actually(or constructively) received, and expenses are deducted when paid or legally charged(like with a credit card).

"Constructive receipt" means the money is made available to you without restriction.  It doesn't always mean you have to have it in your possession.  If it is credited to you, or given to your agent, it is still considered constructively received by you.

Expenses that you pay for are generally deducted in that particular year, unless you have substantially prepaid expenses that actually were for another year.  As an example, if you prepay a three year service contract you cannot deduct the full three years of expense in one year.  You would have to allocate the cost instead.

Note that there are restrictions on which type of business can and cannot use the cash method.  Generally, this method can be used by sole proprietors, corporations with less than $5 million dollars in gross receipts (current 2000 year rules), most general partnerships (unless a C Corporation is one of the partners), and farm businesses with less than $25 million dollars in gross receipts.

Tax planning opportunities exist with the cash method if you can time your constructive receipt of the income in such a way as to push it into another tax year.  When you bill the client, when you actually receive the money and bank it, and when the job and its guarantees reach completion can each define when you have to report the income.

As to taking expense deductions, buying and placing into use such things as business equipment and supplies can be equally timed.  Advertising, marketing, and employee bonuses can also be timed to best suit you for tax planning purposes.

Accrual Method 
Using an accrual method, income is reported in the year it is earned, not necessarily received, and expenses are deducted in the year they are incurred, not necessarily when paid.  From the gross receipts perspective, an accrual method generally means you report the income when the client is billed and/or has received your service or product.  So if you finish a job and bill the client this December 2000,  but don't get paid until January 2001, the income is reported in 2000 under the accrual method.  Note that there are certain exceptions to this if the business transactions involve "related persons, entities, and controlled groups" but this is relatively rare for the scope of this discourse.

Unlike the cash method of accounting, accrual methodology can also involve making adjustments to reported income for bad debt allowances.  If you report income when billed, but do not end up collecting all that is due you, you then may be able to write off the non-collectible portion as a business bad debt.

In regard to business expenses, you deduct or capitalize these when you become liable for them.  This liability issue involves meeting the "events and economic performance" rules.  Before taking the deduction, all necessary events that create the liability must have happened, and the economic performance of the action must have occurred.  Thus, if the expense is for materials, property, or services you incur in the production of income for your trade or business, economic performance occurs as you provide your service or product.

Tax planning avenues that may be open to accrual type operations involve the attempt to defer income into a future year, and accelerate expense deductions into the current year.  In this way, the net income from the business may be lowered for the current year at the expense of the next year.  This may be possible by arranging it so the job you are doing is not fully completed before the close of the year, in which case the receipts collected don't necessarily have to be posted as taxable income at that point.  You get the cash, but defer paying taxes on it until a later date.

Similarly on the expense side, you would attempt to accelerate expenses into the current year so the bill you receive can be written off even though you haven't paid for it yet.  This type of tax deferring can be beneficial in two ways.  First, from a "use of funds" perspective it may make sense since you will have an extra year's use of the tax money you have delayed.  Second, if your business experiences relatively large swings in taxable income from year to year, this is a way of "levelling off" the taxable income, thus possibly lowering the marginal tax bracket and actually saving taxes overall.

So if you are billed for office equipment placed into use in December 2000, but don't pay for it until January 2001, the deduction is taken in 2000 under an accrual method.

While the use of an accrual method may be elective for most, a business that maintains inventory as a significant part of the production of income(stores, manufacturers, wholesalers) must use some form of accrual based accounting for the purchases and sales of the particular products in question.  The full cash method is generally not allowed in this case.

Hybrid Method 
This combination of cash and accrual may be allowable if you can clearly show income and expenses in a consistent methodology.  If you have two distinctly different businesses, you may use a cash method for one, and an accrual method for the other.  If inventory is a significant part of your business, you could use accrual for purchases of inventory and sales of these items, but you may use cash methods for all other income and expense items.

However, there are limitations.  If you elect the cash method for income, you must generally use the cash method for expenses.  Conversely, if you elect accrual for expenses, you must use accrual for income.

Within this hybrid method there may be different elections as to how income will be reported.  As an example, a completed contracts method may be elected for income.  This may apply to a construction-type business where the projects take more than one year to complete.

Minimum Bookkeeping System Requirements
Maintaining a good, acceptable bookkeeping/recordkeeping system should not be solely to satisfy the government.  There's no question that the more successful businesses also have more efficient bookkeeping systems in place.  This is because a good bookkeeping system can give a business the timely information it needs to increase profit-making opportunities.

A good bookkeeping system can help the business answer many important questions such as:

○ How much business is being done?  
○ How much cash is on hand?
○ How much is tied up in receivables, and how old are these receivables?
○ Should credit continue to be extended?  
○ Should collection action be taken?
○ What are the expenses by categories?  
○ What are the important business ratios that should be analyzed?
○ Are sales, expenses, capital, and profits showing improvement over previous periods?  
○ Where is the break-even point?    
○ How does this business compare with others of its size and industry?
○ What is the projected income tax bill going to be, and how can this be minimized?
○ Is payroll at its optimum level, and is there enough cash coming in to meet payroll?

A good bookkeeping system allows the business owner and accountant to create and review important business ratios, profit and loss statements, balance sheets, customized management reports, reconciled bank statements, and required tax return information.

Requirements of a Good System
For most businesses, especially privately-owned ones, an adequate recordkeeping system should be relatively simple to use and understand, accurate, designed to provide timely information, consistent in its treatment of income and expenses, reliable, and exportable in its context.  The last feature refers to how easy it is for others besides the one recording the information to be able to understand, compile, and make adjustments to the information for their own purposes.  Tax accountants, bankers, outside investors, shareholders, and actual business owners fall into this group.

Single Vs Double Entry: There is sometimes a choice between these two types.  A single-entry system is the easier to keep, and also the more limiting for information, auditing, and accuracy-checking purposes.  In single entry, an income or expense item is posted once with no other account offsets.  For simple, one-person sole proprietorships where the owner also pays the bills, collects the income, does the bookkeeping, and where managerial reports are secondary, this system is easier to use and understand.  A single-entry system tends to concentrate primarily on the profit and loss statement and not the balance sheet side, so it is really only a partial system.

The double entry system involves the use of journals and ledgers to track profit and loss and balance sheet items.  Transactions are entered into a journal, then summarized in ledger accounts.  These include income and expenses, assets, liability, and capital accounts.  Unlike the single-entry, the double entry system is designed to be self-balancing.  Every entry involves both a debit and credit in which the ultimate sum of the debits equal the sum of the credits.

At given periods(usually monthly, quarterly, annually), financial statements can be prepared which usually center around the Income Statement and the Balance Sheet.  The income statement is similar to a profit and loss statement in that it reflects the income and expenses for the period.  The Balance Sheet shows the business financial position at a given point in time in regard to assets, liabilities, and capital.    While more complicated to maintain, double-entry systems allow for much more flexibility and standardization.  They help to minimize errors, and possible embezzlement problems.  Further, for businesses that may require audited, compiled, or certified financials (for investors, or lenders, etc.) double-entry systems are definitely the preferred way to go.

Features of an Adequate Bookkeeping System
Whether single entry or double entry is selected, a bookkeeping system should have as a minimum the following component parts:
1)  Income Register: This records and details money received by the business.  It's especially important from a tax audit standpoint to be able to track the nature of the business deposits and differentiate between taxable and nontaxable sources.  This income should be in balance with your bank statements, and supported by sales slips, invoices, register tapes or any documents used in the sales process which are stored separately.
2)  Disbursements Record: This classifies, categorizes, and summarizes the expenses paid out for the business.  Reimbursements and cash payments are handled the same way as checks.  These expenses are recorded according to the date, check number, amount, and expense category.  Further, all expenses should be backed up with an invoice or cash receipt which are stored separately.
3)  Petty Cash Vouchers: For minor, incidental expenses where writing a check would be a nuisance(such as for office coffee, stamps, etc.), the use of a petty cash system is recommended.  A check is written to fund the petty cash box for a designated amount.  Money is taken out to pay for these small items(usually under $5), and the receipts are recorded on petty cash vouchers.  Periodically, another check is written to replenish the petty cash fund.
4)  Travel & Entertainment Reports: For tax purposes, contemporaneous records must be kept for such expenses as food and entertaining, use of vehicle, outside travel, and other employee paid business expenses to be reimbursed.  This T & E log breaks down the expenses per employee, and per category.  In addition, back-up receipts where required for these expenses must be stored in case of audit.
5)  Equipment Register: This records all assets/equipment bought or disposed of by the business.  It shows the dates involved, purchase amounts, check number, supplier's names, and disposition details.  For calculating depreciation, and any tax consequences upon disposition, this register is highly recommended.
6)  Payroll Register: A separate, detailed record is in order for controlling various aspects of payroll.  Records verifying the accuracy of how payroll is calculated, taxes are credited and deposited, overtime is calculated, etc., are mandatory.
7)  Insurance Log: Business insurance policies are identified and detailed as to the type of coverage, premium costs, policy numbers, name of insurer, effective policy dates, and expiration dates(to avoid unwanted loss of coverage).
8)  Accounts Receivable Control Ledger: This helps you keep track of who owes the businesses, how much is owed, and for how long it has been owed.  It is essential to maximize your cash flow situation, and to minimize business bad debts.  Accounts receivable are usually tracked according to their "age" using 30 day, 60 day, 90 day, and 180 day cycles.

Please understand that these eight features represent the minimum for an adequate bookkeeping system.  The nature and type of business dictates what other features or customization should occur.  In fact, many business types customize their systems; restaurants, automotive businesses, manufacturing, and others have their own particular nuances that need to be considered in setting up a system.

IRS Reporting Requirements for Payments
Businesses may be required to send notification to the IRS and state tax authorities for payments made in diverse areas.  These are usually called "information returns" in which the business discloses to the government the nature of the payment, the amount, and to whom the payment was made.

Generally, these forms are required to be distributed to the recipient of the payments as well as to the government.  For IRS purposes, they are usually due on or before February 28 of the year following the year of payment.  There may be penalties charged to any business that fails to file these information returns.  Some of the most common filings are:

Form 1099 Misc: Payments in excess of $600 per individual for services rendered (such as subcontractors, landlords, other nonemployee compensation).
Form 1098:  For payments of mortgage interest in excess of $600 to individuals on loans owed by the business.
Form 1099 DIV:  Payments in excess of $10 per recipient for dividends, and stock dividends.
Form 1099 INT:  For payments in excess of $10 to recipients of interest income.
Form 8300:  Report of cash payments received by a business in excess of $10,000 per transaction or related transactions.
Form W-2:  Payments to employees for wages, tips, and other compensation.  No dollar limitation.

There are many other possible information returns that may be required for different business activities and business types.  However, these are the main ones that tend to impact most average businesses.  When in doubt as to the ones required in your business, check with the appropriate professional before the year ends.

A Word on Computerized Systems
With today's explosion of the use of data processing systems, more and more businesses of all sizes are using computerized recordkeeping systems.  There are no government restrictions or limitations on these systems as long as they meet the same tests and requirements as manual ones do.

The IRS position is that you must be able to show records that provide the necessary information to determine correct tax liability in a way that the auditors can track.  The documentation must show the applications performed, the procedures used in each application, and the controls at hand.  In other words, the computerized system must provide an adequate audit trail back to the original source of entry.

Using Outside Accounting Services
Many firms elect to use outside bookkeeping and accounting services to handle the major aspects of the recordkeeping–especially as it relates to government tax filings.

This may be the most efficient use of a business owner's time.  To try to be an expert in accounting, and to try to keep up with the changes that occur in the field can be prohibitive for a business owner.  So the use of a professional to help design, change, and implement the necessary bookkeeping systems is certainly a viable option.   

Conclusion
Decisions on accounting and bookkeeping issues are important for businesses, especially in the early stages.  The purpose is twofold:
1) To meet government tax filing requirements, AND, 
2) To increase the business chance for success by providing timely, efficient, and informative data with which to make comparative choices.

While it is usually easier to make these choices at the start of the business operation, this is not always possible.  Businesses change along the way.  In fact, running a business is not a static event; rather, it is a dynamic.  These changes may necessitate corresponding changes in the accounting method, year, or bookkeeping system being used.

With few exceptions, it is strongly recommended that a business owner consider using an outside professional for at least some of the decision-making process here.  The expeditious use of this type of assistance in the earlier stages of development can go a long way toward achieving the maximum business success possible.

Reference:  Practice Enhancers, Able & Co.

Recordkeeping Issues in Case of Audit or Review-Bookkeeping Recommendations

Recordkeeping Issues in Case of Audit or Review
There are some sensitive areas where care must be taken in reporting your business income and expenses.  The following list will give an overview of entries which have the potential of being mishandled and which could create problems, especially in review or audit-type situations.

Bookkeeping Recommendations
1) Gross income.  Must be verifiable from bank statements.  Any deposit not income,  i.e.  a loan or refund, must be clearly identified and documented.  The gross should reconcile with any appropriate sales tax returns. Discrepancies with deposits should be explained and proven.

2) Insurance.  Some insurance policies are deductible and others are not.  It is possible for some insurance to be partially deductible. Identify policy payments by coverage as well as dollar amount.

3) Shareholder loans.  Loans to shareholders, especially majority stockholders are red flags for the IRS.  In order to be proper, each loan must be carefully documented as to term, rate of interest, and the ability of the shareholder to repay.  These are three prime considerations(but not the only ones).

4) Vehicle use/personal use.  When a car's use is divided between personal and business use, extra care is required to keep a detailed record of mileage for each.  Expenses and depreciation can then be pro-rated properly for the allowable business use deduction.

5) 1099's, W-4's, W-9's, I-9's.  The 1099-MISC form is given to sub- contractors and other individuals who have been paid over $600 during the year.  There are stiff penalties for paying an individual as a subcontractor, who is really an employee.

• The W-4 is required to be filled out by all employees detailing their  allowances.  It is kept on file by the employer.

• The W-9 is a request by the payor of the payee for the social security number or other tax identification number and whether or not that payee is subject to backup withholding provisions.

• The I-9 is a form required to be filled out by the employee and employer in order to verify employee eligibility status.

6) Travel & Entertainment.  Federal Rules allow for the deductibility of only 50% of your food, and entertainment costs; they must be detailed by date, place, with whom, and business purpose. Travel expense may be fully deductible, but it must be substantiated as to cost and business purpose.

7) Minutes of Meetings.  All domestic corporations are required to have at least one meeting a year and the minutes of that meeting formally recorded.

8) Personal expenditures paid by your corporation.  In a closely held corporation, it is often times easy to have the corporation pay the tab for some personal bills.  Generally speaking these expenditures become constructive dividends to you, thereby not deductible to the corporation.

9) Bills of sale for all equipment.  The purchase and sale of equipment requires documentation detailing description, date, and amount of the transaction.

10) Inventory. Whether you are on an annual or fiscal year, a detailed inventory is required at the end of the year.  List your inventory by item number, description, quantity, and cost method you are using.

The above-mentioned items must be reconciled to your business tax return. This may seem like a lot of extra effort, but failure to have this documentation can lead to possible loss of the tax deduction and extra taxes, penalties and interest charged to you.

Reference:  Practice Enhancers, Able & Co.

Recordkeeping Requirements

Suggested Holding Periods for Tax Records:
1. It is a good policy to save copies of your 1040 and supporting schedules indefinitely.

2. The IRS requires record retention as long as they are important for Federal Tax law. Generally this means:
♦ 3 years from the date the return is filed...or
♦ 2 years from the tax payment date...or
♦ 6 years, if income is under-reported by more than 25%
(whichever is later)

3. Keep ALL--bank statements, checks, receipts and other financial records for at least three years, especially those documents that will support your tax return figures.

4. HOLD INDEFINITELY
♦ All papers and receipts that deal with any purchase, sale and major improvement of your current and all previous principal residences.
♦ All IRA records, investment purchases and sales, and 1040 returns filed for each year.

Please contact this office for details and assistance with any or all of the above. We can guide you and relieve the tedious attention to detail so you can do what you do best.

Recordkeeping

Record keeping
• Tax records should be kept year-round, not hastily assembled just for your annual tax appointment. But which records are important, and how and why do you keep them?
• Without tax records, you could lose valuable deductions by forgetting to list expenses on your return or having unsubstantiated items disallowed if you are audited.
• Generally, returns can be audited up to three years after filing. However, if income is under reported by 25% or more, the Internal Revenue Service can collect underpaid taxes up to six years later. In other words, you need good records to verify what you report on your tax returns.
• Another money-saver; If your records are organized, we will need less time to review your records. This may translate to lower tax preparation fees.

Which records are important?
• Records of income received
• Expense items, especially work-related expenses
• Home improvements, sales, and refinances
• Investment purchases and sales information
• The estate value of inherited property
• Specific uses of loan proceeds
• Medical Expenses
• Charitable contributions
• Interest and taxes paid
• Records on nondeductible IRA contributions

How should you keep your tax records?
Any way that is convenient for you that will allow you to give complete information on each item:
• Who?
• What for?
• When?
• Where?
• Why?
• How much?

Record keeping for Businesses

• The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.
• What records? All businesses should have a permanent set of books, which summarize individual deposits, disbursements, and items of adjustment. These records should be retained indefinitely. Permanent records also include those needed to prove the basis (cost) of depreciable assets.
 • Supporting documents may be needed to validate the journal entries if your returns are examined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax has passed.
 • The supporting documents the IRS reviews include bank statements, cancelled checks, payroll records, invoices, and the like. You should also retain documents supporting deposits that do not reflect income, such as loan documents. If storage is a problem, consider microfilming these documents.
 • What happens if your records are inadequate? If you fail to retain adequate records to support the items claimed on you returns, the IRS has authority to reconstruct your income using one of several methods, including estimating increased net worth, looking at bank records, or estimating the raw materials used in manufacture. Whatever method the IRS uses, you have the burden of proof if you dispute their estimate. Without adequate records, proving the IRS estimates wrong is difficult, at best. You could end up with an assessment for additional taxes, plus penalties and interest.

How long should records be kept?
• Just how long you should keep records is partly a matter of judgment and a combination of state and federal statutes of limitations. Federal returns can be audited for up to three years after filing (six yours if underreported income is involved), so all records substantiating tax deductions should be kept at least that long.

Here are recommended retention periods for various records:

Records	Retention Period
Cancelled    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
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	Ownership period plus 7 years
Journal and general ledger	Life of business plus 7 years
Insurance policies	Life plus 3 years
Inventory records	7 years
Home improvement records	Ownership period plus 7 years
Investment records	Ownership period plus 7 years

Note: Requirements for computer-maintained records are generally the same as for manually kept records.