Planning

January 6 2023

Record Retention Guide for Businesses

Business Tips, Planning, Tax Planning Recordkeeping

In business, good recordkeeping is essential not only for tax reporting purposes but also for the success of the company. Generally, you need to retain records for three years after the filing due date or when you actually filed your tax return, whichever is later. Remember to add six months to this requirement for most state audit time limits. If an error is found that exceeds 25% or more of your obligation, the time limit can be expanded to six years. The guidelines below give retention periods for the most common business records, in a worst case audit scenario. Please call if you’d like assistance with your record retention program.

Accounting Records	Retention Period
Accounts payable	7 years
Accounts receivable	7 years
Audit reports	Permanent
Chart of accounts	Permanent
Depreciation schedules	Life of assets plus 7 years
Expense records	7 years
Financial statements (annual)	Permanent
Fixed asset purchases	Permanent
General ledger	Life of business plus 7 years
Inventory records	7 years (Permanent for LIFO system)
Loan payment schedules	7 years
Purchase orders (1 copy)	7 years
Sales records	7 years
Tax returns	Permanent

Bank Records	Retention Period
Bank reconciliations	2 years
Bank statements	7 years
Cancelled or substitute checks	7 years (Permanent for real estate purchases)
Electronic payment records	7 years

Corporate Records	Retention Period
Board minutes	Life of company plus 7 years
Business licenses	Permanent
Bylaws	Permanent
Contracts – major	Permanent
Contracts – minor	Life + 4 years
Insurance policies	Life + 3 years (Check with your agent. Liability for prior years can vary.)
Leases/mortgages	Permanent
Patents/trademarks	Permanent
Shareholder records	Permanent
Stock registers	Permanent
Stock transactions	Permanent

Employee Records	Retention Period
Benefit plans	Permanent
Employee files (ex-employees)	7 years (Or statute of limitations for employee lawsuits)
Employment applications	3 years
Employment taxes	7 years
Payroll records	7 years
Pension/profit sharing plans	Permanent

Real Property Records	Retention Period
Construction records	Permanent
Leasehold improvements	Permanent
Lease payment records	Life + 4 years
Real estate purchases	Ownership period plus 7 years

December 16 2022

IRA: Can my child set up an IRA?

Planning, Retirement IRA

Question: Can my child set up an IRA?

Answer: If your child has wages or self-employment income, he or she can contribute to an IRA. However, in 2022 the contribution cannot exceed the child’s earned income or $6,000, whichever is lower.

Your child can choose between making a deductible IRA contribution and a nondeductible Roth IRA contribution. In most cases, a Roth IRA will have the greatest long-term benefit for your child.

December 13 2022

Is a Section 529 plan the right college savings plan for you?

Education Expenses, Planning, Savings College

529 college plans

There are many ways to save for college, but one thing is certain: it is never too early to start. One way to save for college is with a “Section 529” plan. These plans offer a way to pay for college expenses with some nice tax advantages.

What are they?

Section 529 plans allow you to set up a tax-advantaged account to pay for your child’s college education. There are two types of Section 529 plans: prepaid tuition programs and college savings plans.

Prepaid tuition programs let you lock in today’s tuition costs by purchasing tuition credits or certificates that a student redeems when he or she starts college.
College savings plans let you make contributions to a state-sponsored savings account to build a fund for your child’s college expenses. These accounts are generally managed by a private mutual fund company. This is the Section 529 plan you’ve probably been hearing about, and it is this type of college plan that is the focus of this article.

How do Section 529 college savings plans work?

Make a gift to set up an account. You start by setting up an account and naming your child (or anyone else) as the beneficiary. Your contribution is considered a gift. Your contributions qualify for the $14,000 annual tax-free gift exclusion ($28,000 for married couples making a joint gift).Special rules for 529 plans let you average your gift over five years. This means married couples can make a $140,000 joint gift and individuals can make a $70,000 gift in a single year, without incurring gift tax. However, you cannot make additional gifts to your child for five years, or you may owe gift tax.
Your contribution is limited. You aren’t permitted to make contributions to a 529 plan beyond what is necessary to pay for your child’s college expenses. Each plan sets its own limit. Most plans allow you to make either a lump sum contribution or a series of monthly contributions. All contributions must be made in cash; you can’t contribute shares of stock or other property to these plans.
You remain in control. You cannot choose the investments in the fund – you must choose one of the plan’s investment options. However, you do remain in charge of all withdrawal decisions. You can allow your child to make withdrawals to pay for college expenses. If your plan permits it, you can change the beneficiary to one of your other children. If you change your mind about maintaining the account, you can even request a refund (tax and penalties will apply).
Your child can withdraw money to pay for college expenses. Section 529 funds must be used for qualified higher education expenses, such as tuition, fees, books, and supplies. They can also be used to cover certain room and board expenses, as long as your child attends school at least half-time. If your child receives a scholarship, you can request a penalty-free refund up to the amount of the scholarship. In addition, you can withdraw the funds if your child becomes disabled or dies. If the funds are withdrawn for any other purpose, you (not your child) pay tax on the earnings that have accumulated in the fund.
You can change plans. You can make a tax-free rollover to another plan with the same beneficiary. That allows you to move your child’s plan to another state’s plan without losing the tax benefits. This tax-free rollover treatment only applies to one transfer within any 12-month period.

What are the benefits?

Section 529 plans offer tax benefits. Your contribution is not tax-deductible, but your investment grows tax-deferred. That allows your money to grow faster than a similar investment in a taxable account. Qualified distributions from Section 529 college savings plans are tax-free.
Section 529 plans offer an estate planning opportunity. Section 529 plans let wealthy parents or grandparents transfer wealth out of an estate and into an account a child can use to pay for college expenses.

What are the disadvantages?

While these plans offer an attractive alternative to other college funding plans, they are not without drawbacks. There are a number of factors you should consider before you invest in a Section 529 college savings plan.

Substantial penalties apply to nonqualified withdrawals. Any nonqualified distributions will be subject to withdrawal fees and penalties. You’ll also owe income tax on the distribution.
Your state plan may not meet your investment expectations. You should choose from among the available plans the one that meets your risk tolerance and performance expectations. But what if you are unhappy with a plan’s investment performance? If your plan allows rollovers, you can move the funds into another plan. If you simply request a refund, you’ll have to pay income tax and penalties on the distribution.

Do your homework.

The same federal income tax rules apply to all Section 529 college savings plans. However, each plan has unique features. Here are some items you should compare when you evaluate different plans.

State income taxes.
Investment return.
Enrollment fees.
Maximum contributions.
Flexibility in making contributions.
Withdrawal fees and penalties.
Transferability to another beneficiary or another qualified plan.
Choice of schools.
Participation by nonresidents.
Beneficiary age restrictions.
Covered education expenses, including restrictions on room and board.

Section 529 plans provide an attractive, tax-favored way to save for college. However, they are not the right choice for everyone.

December 1 2022

Avoid the 10% Early Withdrawal Penalty

IRS Rules, Planning, Retirement IRA, ira withdrawals

What every Traditional IRA owner should know

It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA, it is quite another when you pay the tax PLUS a 10% penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:

Medical insurance premiums if unemployed. If you receive federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.
Qualified higher education expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10% penalty.
Medical expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 7.5% of your adjusted gross income you may do so penalty-free.
First-time home buyer. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. To qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.
Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.
You’re the beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.
Qualified reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.
Annuity distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life expectancy.” This option is complicated and must use an IRS-approved distribution method to qualify.

Some Final Thoughts

Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.
While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.
While generally the same, the 10% early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.
Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.

November 4 2022

Cash flow statements: The essential report

Business Tips, Money Management, Planning Cash Flow

Cash flow statements

One of the most perplexing concepts can be understanding cash flow. This is because cash flow is not profits, nor does operating losses necessarily mean poor cash flow.

However, cash flow is important. It can be very frustrating when payroll is due and you have no money to pay it. What do you do when the banker is calling you about not being able to make your payments, yet your income statement shows a healthy net profit? Your income statement properly reflects all your sales, even those made on accounts receivable. So the profit you should have available to meet expenses is tied up in accounts receivable.

Or perhaps you have acquired new equipment and paid for it with cash. With your operating profits tied up in new assets, you have a cash shortage. On the other side of the coin, you may have sold a piece of real estate or equipment and have a large cash balance in your checking account, yet your income statement shows a loss.

Here are the three elements to properly manage cash flow –

Collect your cash as rapidly as possible.
Pay out cash as slowly as possible and still maintain good credit and good vendor relationships.
Make the best use of cash held in the business.

A cash flow statement will show you where the cash is coming from and where it is going. Best results are usually obtained by using monthly cash flow statements and projections based on prior experience. Building a history of cash flow needs by using historical financial records will provide an invaluable tool for managing your business.

If you do not track your cash flow on a timely basis, now would be a good time to construct the proper reporting.

November 1 2022

IRA: Should I convert my traditional IRA into a Roth IRA?

Planning, Retirement IRA, roth IRA

Question: Should I convert my IRA to a Roth IRA?

Answer: Roth IRAs are very attractive because once money is inside a Roth, it may never be taxed again. However, before you rush to convert your traditional IRA to a Roth, there are a number of factors you should consider.

How much after-tax money will you end up with for retirement? You’ll need to make some assumptions about your future tax rate, your retirement age, and your investment return. Then you’ll have to run the numbers to see whether you’d end up with more money, after taxes, if you left it in your traditional IRA or if you converted to a Roth.
Do you have enough cash to pay conversion taxes? When you convert, you’ll owe regular income taxes on the amount you roll over to your Roth. If you have to sell outside investments to pay taxes on the rollover, you’ll owe taxes on any gains from those sales as well. If you have to cash out part of your IRA to pay taxes, you’ll be socked with a 10% penalty unless you are over 59½.
How soon will you need the money? Generally, you cannot withdraw the earnings on the money within five years of the conversion without a penalty.
Will the conversion income push your adjusted gross income to the point where it will cost you valuable tax benefits, such as certain deductions and tax credits?
Will it push you into a higher tax bracket?

As you can see, deciding whether a Roth conversion is right for you involves careful planning.

October 4 2022

Health Savings Account (HSA)

IRS Rules, Planning, Savings Savings

Health savings accounts (HSAs) are similar to IRAs, except they’re intended for medical expenses rather than for retirement. You can make a tax-deductible contribution to an individual HSA or to a family HSA. If you’re 55 or older, your annual contribution can be larger. If your employer makes the contribution as part of a cafeteria benefits plan, it isn’t taxable to you. Earnings on investments made with your contributions won’t be taxed currently, and withdrawals are also tax-free if they are used for a broad range of medical expenses.

Of course, there are restrictions. To be eligible for an HSA, you must be covered by a health plan with a high deductible. These high deductible health plans can save you money, since they should have lower premiums. You must be under 65, and therefore not eligible for Medicare, when opening an HSA. If you withdraw HSA funds for non-health expenses, you’ll pay taxes, plus be subject to a penalty if you do it before age 65.

September 29 2022

In The News: September 2022 Tax News

IRS Rules, Planning, Tax Law, Tax Planning tax law

September 2022: IRS urges everyone to update and secure their records to prepare now for natural disasters

September is National Preparedness Month. With the height of hurricane season fast approaching and the ongoing threat of wildfires in many places, the Internal Revenue Service urges everyone to develop an emergency preparedness plan, or if they already have one, update it for 2022.

Everyone, from individuals to organizations and businesses, can start now by:

Securing and duplicating essential tax and financial documents.
Creating lists of property.
Knowing where to find information once a disaster occurs.

In the aftermath of a disaster, having the updated documents and other information readily available can help victims apply for the relief available from the IRS and other agencies. Disaster assistance and emergency relief may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.

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Proposed Tax Legislation

The following is an overview of several recent tax proposals discussed or introduced in Congress over the past several weeks. It is important that you not treat these proposals as passed legislation. Many hurdles remain before any of these legislative ideas become law. In the meantime, it is useful to see what types of tax laws may be affecting you in the future.

EARN Act (Senate Bill 4808): This bill, introduced Sept. 8, proposes to amend the Internal Revenue Code of 1986 to reform retirement provisions.
Firearm Industry Fairness Act (House of Representatives Bill 8741): This bill, introduced Aug. 23, proposes to amend the Internal Revenue Code of 1986 to impose a tax on the total revenue of manufacturers and importers of semi-automatic assault weapons.
RETURN Act (House of Representatives Bill 8742): This bill, introduced Aug. 23, proposes that employees of the Internal Revenue Service are brought back to their offices until the backlog of 2020 tax returns has been eliminated.

IMPORTANT: The above are proposals. There are many steps each bill must go through before they are signed into law.

Information retrieved from: GovTrack.us

September 20 2022

Don’t neglect your succession planning

Business Tips, Planning, Retirement business

Succession planning

Succession planning can be one of the most difficult issues faced by a family-owned business. As a business owner nearing retirement, how do you transfer leadership (and perhaps ownership) and keep the business running smoothly? Unfortunately, many businesses don’t survive the transition to the next generation.

As with most business problems, good planning is the key. You’ll need to consider four sets of issues:

Choice of a successor. Often the first preference is for a family member to take over. But the obvious family members may lack the skills, temperament, or interest to run the business. Sometimes several family members are interested in the position, and family squabbles or rivalries can interfere. That’s why an outsider is often chosen as an independent manager.
Transfer of ownership. Whether or not a family member takes over the top position, you’ll still eventually need to transfer ownership to the next generation. That involves questions of estate planning, taxation, and form of business. This is an area where you’ll need sound legal and accounting advice.
Liquidity. Often a transfer of ownership involves issues of liquidity and funding, especially if it happens upon the death or disability of the founder. You’ll need to consider key man life insurance and disability insurance, as well as tax and estate planning issues.
Personal issues. In a family-owned business, it is often very difficult for the founder to retire and hand over his or her “baby” to someone else. And if a family member is the successor, the potential for interpersonal conflict increases. It’s essential to confront and discuss this issue beforehand. It can be useful to have one of your professional advisors mediate these discussions.

One factor is common to all business successions. It’s never too soon to start the planning. Don’t delay until retirement is imminent. This is a mistake for two reasons. First, your initial succession attempt may not work out. Second, a sudden accident or illness may force you to change leadership earlier than expected.

If you’re facing this situation, please plan now to do something about it.

July 28 2022

How to Correct an Error on my Tax Return?

Business Tips, Financial, Planning IRS, tax returns, taxes

Question: After I filed my tax return, I discovered an error. How do I fix it?

Answer: Oversights and errors are not uncommon, so the IRS provides a way for you to correct them. You can correct your return for up to three years after you file your original return by filing an amended return with the IRS.

You need to tell the IRS why you are correcting the return, and include the appropriate documentation with your amended return.

If you’ve discovered income or deductions that you should have reported on your income tax return, give us a call. We can help you set the record straight and pay only the tax actually due.