Tag Archives: Taxes

Keeping Your Tax Records: When can you get rid of them?

Did you make a New Year’s resolution to get organized this year? Maybe it was all that paperwork sitting around, or those boxes of old files that made you (or your significant other) say “I’ve had enough! We have got to stop living like pack rats.”

You probably have a lot of old paperwork related to old tax returns and your business. Why not give all that old stuff the heave-ho and start fresh? Let’s get those garbage bags we got from the mega discount store and get to work!

That sounds like a good idea, but let’s not start pitching just yet. The IRS has certain rules for how long you have to hold on to certain types of paperwork. So before we start clearing out the old junk, let’s take a look at what the rules are.

To start off with, the IRS has certain rules related to what to do if you do not file a return, file a fraudulent return, or do not report some income. I am certain you wouldn’t do that, but if it happens that you don’t file or filed a fraudulent return, you need to keep records related to the income and expenses for that year indefinitely. This is so that if you ever get caught, you will need to produce a good tax return. So it behooves you to file a correct return every year.

So if you do file a return, and either owe taxes or get a refund, keep these record for three years from the time the return was due, or two years after the tax you owed was paid, whichever is later. So for the return due April 15, 2015, you will need to keep these records until April 15, 2018. But if you owed taxes and didn’t pay them until December 15, 2016, maybe due to having an installment plan with the IRS, keep these records until December 15, 2018.

If you had a claim on your tax return for worthless securities, or took the bad debt deduction, you will need to keep the records related to this return for seven years.

Do you have employees in your business? You will need to keep all tax records related to those employees for at least 4 years after the later of the date that the tax becomes due or is paid.

How about record related to any property you have purchased. You will need to keep these records for as long as you own the property. In addition, once you sell the property, you will keep those records until the tax return is filed, and the period you need to keep the records for that tax return. The records for the property is needed to calculate the deduction for depreciation, amortization, or depletion, as well as to calculate the gain or loss when you sell or dispose of the property.

Do you have any stories about keeping records for a long period of time? I’d love to hear about it. Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Circular 230 Disclosure:  To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.

Choosing The Form of Business For Your New Company

Have you had enough?  Are you done working for someone else, and making someone else rich?  Do you have the skills to do the work and spend the time required to run your own business?

It may be time to get started.

So you sit down at your computer and get ready to register with the IRS.  You start to register your business, and they ask you to choose the type of business entity.

And the option for “one that makes me a lot of cash” isn’t on the list.

So you stop and ask yourself, “Seriously, which one of these do I choose?”

Let’s run through the different types you could choose.  Keep in mind that this is just a primer, and more posts about each of the forms will be coming.

Sole Proprietor

The first one you could choose is a sole proprietorship.  This basically means that you are working by yourself.  You can have some employees, but you are the only owner.  You have complete control over everything, and get all of the income.

It the easiest to form, but it does come with some disadvantages.  If you get into trouble with a client, and they sue you, they could take all your personal assets.  That includes your house, your car, and everything else you own.  Additionally, when you die, so does your business, so it can’t be passed on to your kids (or anyone else for that matter).

In addition, you will owe self-employment taxes.  When you worked for someone else, your employer paid employment taxes on what they paid you.  As the owner of your own business, you will have to pay not only your own payroll taxes, but what would be considered your employer’s portion as well.

You would consider this form of business if you are just starting out, want something simple, and aren’t very concerned with liability protection.

Limited Liability Corporation

So you want to keep it simple, but want a little more protection. A limited liability corporation would give you some limited liability protection, meaning that if you get sued, you won’t lose your personal assets.  You also don’t have as much paperwork as other forms.  And like a sole proprietorship, you also get all the profits.

You face the same disadvantages you would if you had selected to be a sole proprietor.  However, you do get some liability protection, as choosing this form gives you some liability protection by separating you from your business.

This form is great because it is simple and provides some liability protection.  You would still want some insurance all the same since you never know when a customer may decide you did them harm, or an employee does something that hurts a customer.

Partnership

Let’s say you found someone who compliments your talents, and you decide to go into business together.  A partnership is easy to form, as well as inexpensive.  You also get to share the financial burden with someone else.

However, the downside is that you are personally liable for not only the debts you incur for the business, but any that your partner incurs.  So if you go into business with someone not so trustworthy, they could rack up a large amount of debt, and leave you with the responsibility to pay it off.  Be sure that you not only find someone trustworthy to go into business with, but talk with a lawyer to draw up a partnership agreement that protects you and your interests.

Corporation

A corporation is what a lot of people think of when they decide to go into business.  While the other business forms need to be looked at when setting up your new venture, there are several advantages to setting up a corporation.  The biggest is that you have limited liability, with your personal assets protected from any lawsuits filed against the business.  It is also easier to obtain operating cash, since you can sell stock to bring in funds.  There are some tax advantages, such as lower tax rates than the other forms.

The disadvantages to the corporate form is that it is very expensive to form, and the paperwork can be overwhelming.  The record keeping to stay in compliance with the regulations can be quite a burden.  Additionally, the earnings are taxed twice.  This means that taxes are paid on the earnings of the corporation, and then the dividends paid to the shareholders will be taxed.

You would choose this form of business if you were expecting that you would want to grow your company with outside funding, and have the maximum amount of liability protection provided by a form of business.  In addition, you aren’t fazed by the amount of paperwork you need to do.

S-Corporation

Lastly, there is the S-Corporation.  This is a special kind of corporation, but instead of the taxes being levied on the corporation, the items of income and loss are reported on the tax return of the shareholders.  It does have the advantage of being exempt from federal taxes, with the earnings of the corporation being taxed on the shareholder’s return.  However, like the corporate form, there are regulatory requirements, as well as shareholder compensation requirements that might make this form unattractive to someone starting a company.

You would choose S-Corporation status if you had less than 100 shareholders and wanted the advantages of being a corporation.

Choosing the right form for your business can be confusing and stressful.  Drop me a line at chrispedencpa@yahoo.com so we can discuss the right one for your business.