Mt. Shasta Chamber Weblog

When to keep or throw out tax documents?

by Aiello-Goodrich-Teuscher

Is Time on Your Side?

How long do you have to keep the tax records described in this article? Like many issues in tax law, it depends.

Practically speaking, the statute of limitations on additional tax assessments runs for three years from the time that you’ve filed your tax return or the due date, whichever comes later. For example, you should hold onto 2010 records until at least April 18, 2014 (October 17, 2014 if you’ve obtained a filing extension).

However, the IRS has the ability to go beyond three years – up to a period of six years — to audit a tax return if it suspects that gross income has been substantially underreported. In this case, “substantially” means an understatement of 25 percent or more of the gross income reported on the return.

And there is no time restriction if a false or fraudulent return is filed. In those cases, the IRS can go back as long as it wants to assess taxes plus penalties and interest.

To play it safe, some tax experts recommend keeping records for as long as ten years. Conversely, if you’re trying to remove clutter from your files, three years is the bare minimum.

Once your 2010 tax return has been put to bed, you can rest easy until it’s time to prepare for filing next year…right? Wrong. Before you turn out the lights, collect all the vital materials from your 2010 return and store them in a safe place. The documents you don’t need any more can be thrown away, after shredding them or destroying them, of course.

In many cases, tax returns are now filed electronically, so that cuts down on the mound of paperwork you’ve faced in the past. But you still have to keep certain records for a minimum period of time (see above in green). We’re not a “paperless society” quite yet. You must also cope with recordkeeping burdens for the 2011 tax year.

What sort of records are we talking about? It depends on your particular situation, but here are several common areas where record retention is a must. Otherwise, you can run any extraneous papers through the shredder. (To find out how long to hold onto records, see above in green.)

Securities: Normally, you’re advised to keep records of trading activities and 1099 forms for securities, especially as they relate to the “basis” of these investments.

New rules have eased the responsibilities for securities, but you’re not completely home-free.

Under a 2008 tax law, financial institutions must provide you with information indicating the basis of securities sold, the amount of the sales proceeds and whether a gain or loss is long-term or short-term. These new rules are being phased in over a three-year period, but they generally apply to sales of stocks and mutual funds acquired after 2010. To establish basis, you still must retain the information for securities purchased before 2011.

In addition, retain 1099 forms for dividends and capital gains reported from mutual fund investments. Set up a system for tracking dividend reinvestments. If you don’t, you might end up paying tax on these amounts twice — once when they are reported as dividends and once when the securities are sold. Finally, it’s recommended that you hold onto year-end reports.

Charitable donations: These tax rules were changed back in 2007. Now you have to meet stricter substantiation requirements for cash and cash-equivalent donations.

For starters, it’s necessary to have a written confirmation from the charity or bank statements or other receipts to prove deductions. For contributions of $250 or more, you should corroborate gifts with a contemporaneous written acknowledgement. If you’ve donated property valued at more than $500, you must document the information about the gift. Note that an independent appraisal is required for gifts of property above $5,000.

Travel and entertainment: The IRS often zeroes in on travel and entertainment (T&E) deductions that look suspicious. Sometimes, special limits for luxury cars and other T&E items are ignored or misrepresented by taxpayers.

Keep contemporaneous records of your T&E events listing all the details on dates, locations, amounts, the business parties involved and your business purposes. For convenience, you can set up a spreadsheet. Receipts for any expenses of $75 or more must be retained.

Home expenses: Hold onto the 1098 forms you’ve received for mortgage interest and property taxes. For home improvements, keep receipts of expenditures that may be added to your basis. If you sell the home in the future, the basis adjustments can reduce any taxable gain above the usual $250,000 home sale exclusion ($500,000 for joint filers). The improvement documents should be held until you sell the property.

IRA and retirement plans: Keep records of contributions to traditional and Roth IRAs as well as amounts contributed to a 401(k) or other employer-provided retirement plans. Note: You can’t extend the deadline for making an IRA contribution for the 2010 tax year if you’ve obtained a filing extension. As with securities (see above), retain year-end statements for retirement accounts.

Finally, remember that organization is important. Store your records neatly in a manner where you can access them quickly. This can also help with the preparation of your 2011 return.

Compliance Hints for Employers

by Aiello-Goodrich-Teuscher

CHANGES TO TAX PAYMENT METHODS:

Starting in January 1, 2011 the IRS will no longer allow federal tax payments to be made with the paper coupons, Form 8109. This applies to payments made at a local bank or being mailed to Financial Agent at the IRS. If payments are made using the paper coupons after that time, the IRS will assess a failure to pay penalty. They want everyone to transition to making tax payments using the Electronic Federal Tax Payment System (EFTPS).

There is an exception; if your federal tax liability for a quarter is less than $2,500, you can remit the taxes due with your quarterly return, Form 941.

If you have not already applied to use the EFTPS program, you should do so right away. It takes 2-3 weeks for the IRS to process your application and send out a confirmation letter with a PIN number. Payments can then be made by phone or online. We can make these payments for you, or you can make them yourself. Completing the setup application early gives you a little cushion of time to get comfortable with the process.

To sign up fill out the online application at: https://www.eftps.gov/eftps/

Or, if you would like help you with the application, please call your accounting firm.

CHANGE IN EMPLOYMENT POSTER REQUIREMENTS:

Each year employers are required to purchase the new “Notice to Employees” poster and to display it in a conspicuous place where employees have easy access to it. This year California’s Division of Worker’s Compensation (DWC) has implemented new regulations that require all employers in California to post a revised Notice to Employees – Injuries Caused by Work.

Failure to post the notice by the October 8, 2010 deadline can result in fines up to $7,000 in civil penalties.

In addition to posting the new notice, you are also required to distribute a new “Your Rights to Workers’ Compensation Benefits” pamphlet to all new employees who start to work on or after October 8, 2010. The pamphlets should be given to new employees at the time of hire or before the end of the first pay period.

You can purchase the new poster and the pamphlets from several different sources. Two websites offering these items are www.laborlawcenter.comand www.governmentposter.comIf you already use a different source for your posters, you can probably get the updated poster and pamphlets from them.

Health Reform and Small Business: Impacts and Opportunities

The Mount Shasta Chamber of Commerce’s  general membership meeting will take place at noon at Lalo’s on September 9th.

Dr. John Harch, Elizabeth Mitchell-Collord and Lynn Teuscher will introduce us to impact and opportunities the upcoming health reforms will have on small businesses.  After an overview and a physician perspective given by Dr. Harch, Elizabeth will explain the individual mandate and the health insurance exchanges and Lynn will clarify the employer tax credits and penalties.

There will be time allowed for questions and answers.

Hiring Summer Help? Tax Breaks and Rules to Keep in Mind

Catch Three Tax Breaks For Summer Help
With the summer now here, you may be expanding your workforce to accommodate increased seasonal demand. Fortunately, there’s usually a good source of available labor, including high school and college students, workers recently laid off, and retirees looking to pick up some extra cash. You might even keep summer interns on board longer if they work out to your satisfaction. Be aware that certain legal requirements apply when you add summer help to the staff. In particular, your business must comply with federal and state laws regarding minimum pay standards, workers’ compensation and discriminatory practices (see right-hand article). However, if you stay within the legal boundaries, you can realize extra tax benefits for hiring certain workers this summer.

The three main tax breaks for employers are the Work Opportunity Tax Credit (WOTC), the payroll tax exemption for previously-unemployed workers and the new tax credit for retaining those workers:

1.The WOTC - If you hire a worker from one of the designated “target” groups, your business can claim a tax credit equal to 40 percent of up to $6,000 of first-year wages. Maximum credit: $2,400 per worker. The WOTC, which has been extended several times in the past, is currently scheduled to expire after August 30, 2011.

The list of targeted groups includes:

• Temporary Assistance to Needy Families (TANF) recipients;
• Qualified veterans;
• Ex-felons;
• Designated Community Residents;
• Food stamp recipients;
• Vocational rehabilitation referrals (or Ticket-to-Work holders);
• Supplemental Security Income recipients (or Ticket-to-Work holders);
• Disconnected youths; and
• Summer youth employees.

The credit for summer youth employees differs from the regular WOTC. It is only available for individuals age 16 or 17 who work for your business between May 1 and September 15. The credit for these workers is 40 percent of the first $3,000 of wages. The maximum credit per worker is $1,200. To qualify, the youth must reside in an Empowerment Zone, Enterprise Community or Renewal Community. Contact your tax adviser for information about meeting the certification requirements.

2. Payroll tax exemption - Normally, an employer must pay the 6.2 percent portion of Social Security tax on the first $106,800 of an employee’s wages in 2010. The 1.45 percent portion of FICA tax applies to all wages. However, under the new Hiring Incentives to Restore Employment (HIRE) Act, the 6.2 percent Social Security tax liability is waived for wages paid to qualified employees hired after February 3, 2010 and before January 1, 2011.

A qualified employee is one who:

• Has not been employed for more than 40 hours during the previous 60 days.
• Was not hired solely to replace another employee (other than voluntary separation or for cause).
• Is generally not related to the employer.
• Does not own, either directly or indirectly, more than 50 percent of the employer.

Note that a qualified employee may work for any number of hours. In other words, it applies to both part-timers and full-timers. However, you’re not allowed to claim the WOTC if your business takes advantage of the payroll tax exemption. You can choose to bypass the payroll tax exemption if the WOTC is more favorable.

3. Worker retention credit - Finally, your business is eligible for a new tax credit if it keeps these previously-unemployed workers employed for at least 52 consecutive weeks. Each credit equals the lesser of $1,000 or 6.2 percent of the wages paid to the worker during the 52-week period.

To qualify, the HIRE Act requires your business to pay a retained worker an amount equal to at least 80 percent of the first 26 weeks of wages paid during the last 26 weeks of the 52-week period. Unlike the payroll tax exemption, the retention credit may be claimed for a worker for which you claim a WOTC.

Consult with your tax advisers concerning the coordination of these tax benefits for employers. Then it’s ready, aim, hire!

Keep These Rules in Mind When Hiring Interns
If your business or organization is planning on using unpaid or low-paid student interns this summer, here’s an important rule to follow: Make sure the work is mostly about training.
For employers, offering student internships often involves bringing in unpaid or low-cost help (below minimum wage) during summer months when employees are taking vacations. The advantage to the employer is obvious: Free or cheap labor.

For students, the internship means on-the-job training that could bring future opportunities and recommendations.

But before bringing unpaid interns (or those paid below minimum wage) into the workplace, consider the implications and obligations. If most of the interns’ workplace activity is actually training experience rather than contributing to the employer’s purposes, then the U.S. Department of Labor (DOL) rules allow non-payment or less-than-minimum-wage to the interns.

However, just because the Labor Department and the federal Wage and Hour Law exempt employers from treating interns (or trainees) as employees, other federal and state laws may consider them as employees. For example, interns usually are protected by discrimination and harassment laws.

And depending on state laws and specific circumstances, unpaid interns may be protected by Workers’ Compensation laws. Even if an unpaid intern in a specific case is not covered by a state’s workers comp law, the injured worker could sue the employer for medical costs and damages.

Labor Department Rules
In today’s economy, some organizations might want to use unpaid or less-than-minimum-wage interns to fill the void left from laid-off employees. But make sure interns aren’t replacing employees and don’t hinder opportunities for prospective employees. The federal Fair Labor Standards Act bans both practices and many states impose additional restrictions.

Employers must pay interns at least the minimum wage unless the internship experience passes these six rules:

1. The work performed (the DOL uses the word “training”) is an extension of a trade studied by the student or similar to the intern’s school training.
2. The work (or training) is for the benefit of the student intern.
3. The intern does not replace regular employees, but works under their close observation.
4. The employer derives no immediate advantage from the student intern’s activities. (The intern’s activity is primarily an educational experience and doesn’t significantly benefit the employer.)
5. The intern is not necessarily entitled to a job at the conclusion of the internship. The employer holds out no promise of future employment.
6. The employer and the intern understand that the student is not entitled to wages for the time spent in the internship.

Advantages of Paying
As you can see, unpaid interns are not a good idea in most situations. For example, unpaid interns can’t replace paid employees who are on vacation. And they can’t do any work that significantly benefits or profits the employer, which is a difficult hurdle to clear.

So what should employers do? Use interns…but pay them. Talented, educated, and motivated students are typically eager to gain real-world experience in the fields they are studying. So they’re willing to work for less than seasoned individuals. By hiring interns for summer replacements, you can gain productive employees at reasonable pay levels.

There are benefits for paying fair wages to interns. Paid interns are more likely to:

• Feel more appreciated and, therefore, be more productive.
• Be enthusiastic in supporting and promoting the business or organization after the internship is over.

Plus, using interns can be a good recruiting tool. The best might return in a paid capacity someday.

Calculating the Small Employer Health Insurance Tax Credit for 2010

by Dorian Aiello, Managing Partner Aiello-Goodrich-Teuscher

For tax years beginning in 2010 through 2013, eligible small employers (including small Non-Profit Organizations) that purchase health insurance coverage for their employees may be eligible for a tax credit to offset the cost of insurance coverage. This is one of the few provisions of the new Health Care Act that is effective this year (2010).

Too Much Paperwork? What You Can Toss Now.

Courtesy of Aiello-Goodrich-Teuscher

Perhaps it’s a good thing that the April 15th tax deadline and the urge to spring clean coincide. It can feel refreshing to throw out some of the financial records stuffing your filing cabinets. But before you head for the dumpster, make sure you’re not disposing of records you may need. You don’t want to be caught empty-handed if an IRS auditor contacts you.

In general, you must keep records that support items shown on your individual tax return until the statute of limitations runs out — generally three years from the due date of the return, or the date you filed, whichever is later. In most cases, the IRS can audit your return for the same three years.

You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income.

So, does that mean you’re safe from an audit after three years? Not necessarily. There are exceptions. For example if the IRS has reason to believe your income was understated by 25 percent or more, the statute of limitations for an audit increases to six years. If there is suspicion of fraud or you don’t file a tax return at all, there is no time limit for the IRS.

How Long to Keep Documents?
Like most issues involving the IRS or other government agencies, there’s no easy answer to that question. The IRS does not require you to keep records in any particular way. But here are some basic rules to follow for individuals (Guidelines for businesses are in the right-hand chart):

Completed tax returns. Many tax advisers recommend that you hold onto copies of your finished tax returns forever. Why? So you can prove to the IRS that you actually filed. Even if you don’t keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records. Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least the three-year period.

Exceptions. There are some cases when taxpayers get more than the usual three years to file an amended return. You have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

Real estate records. Keep these for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims, and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities. To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestments, and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

Individual Retirement Accounts (IRAs). The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRA accounts. With the introduction of Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.

Issues affecting more than one year. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

These general recordkeeping guidelines are for tax purposes. Insurance companies and creditors may have other requirements.

How Long Does the IRS Have to Request Records and Assess Additional Tax? If You: Then the Statute of Limitations Is: 1. Owe additional tax and #2, 3, and 4 below do not apply to you. 3 years from the due date of the return, or the date you filed, whichever is later. 2. Do not report income that you should and the amount is more than 25 percent of the gross income shown on your return. 6 years from the due date of the return, or the date you filed, whichever is later. 3. File a fraudulent return No limit 4. Do not file a return at all No limit 5. File a claim for credit or refund after you file your return The later of 3 years, or 2 years after the tax was paid. 6. File a claim for a loss from worthless securities 7 years from the due date of the return, or the date you filed, whichever is later.

Business Record Guidelines Employee Earnings Maintain for a minimum of four years, to meet various state and federal requirements. Employee Time Cards Keep for at least three years if your business is subject to the Fair Labor Standards Act (engaged in interstate commerce), although it’s a good practice for all businesses to keep the files for several years in case questions arise. Personnel Records Retain three years after an employee has been terminated. Employment Tax Records Keep four years from the date the tax was due, or the date paid — whichever is longer. Employee Business Expenses For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period. Sales Tax Returns State regulations vary. Check with your tax adviser for the required record retention period for returns and supporting documents. Business Property Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.

Enterprise zone, what’s in it for you?

SISKIYOU ENTERPRISE ZONE

The Siskiyou Enterprise Zone is one of only 42 in the state of California.  California Enterprise Zones were created to assist businesses located in the zones to lower their operating costs by providing them with tax credits and deductions. The incentives are outlined below:

EMPLOYER HIRING CREDITS

Over a 5-year period per each qualified employee can be claimed by an Enterprise Zone business resulting in approximately $35,000 in tax credits. An employee can qualify under any one of 13 different categories including TEA.

For more information visit the Department of Labor website www.dol.gov.

TARGETED EMPLOYMENT AREA

The county boundaries are designated as the boundaries of the TEA. Therefore any employee residing in Siskiyou County can qualify to be vouchered based on their address.

SALES & USE TAX CREDITS

An Enterprise Zone business can receive a tax credit of 100% of the sales/use tax paid for equipment purchases for use in the zone. Machinery, machinery parts, telecommunications equipment and office equipment such as copiers, printers, fax machines and telephone systems also qualify.

For more information visit the Franchise Tax Board website www.ftb.ca.gov and refer to Publication 1047.

BUSINESS EXPENSE DEDUCTION

An accelerated depreciation is available for tangible personal property the first year it is placed in service in an Enterprise Zone. Office supplies and inventory do not qualify. Limits: $20,000.

For more information visit the Franchise Tax Board website www.ftb.ca.gov and refer to Publication 1047.

NET INTEREST DEDUCTION

Lenders can earn tax-free interest on loans made to Enterprise Zone businesses.

For more information visit the Franchise Tax Board website www.ftb.ca.gov and refer to Publication 1047.

NET OPERATING LOSS CARRYOVER

100% of Net Operating Losses may be carried forward for 15 years to reduce the amount of taxable income for those years. For more information visit the Franchise Tax Board website and refer to Publication 1047.

PREFERENCE POINTS ON STATE CONTRACTS

The purpose of preference points on state contracts is to encourage businesses within the zone to participate in state contracts thereby encouraging added economic development and employment opportunities to the zone region.

The Enterprise Zone Act (EZA) provides a 5 percent bid preference on service and commodity contracts valued at more than $100,000 if the business work site is located in an enterprise zone as designated by the State Housing and Community Development Department.

The EZA allows state contracting officials to give California based companies the bid preference when 50% of the labor required to perform a commodities contracts or 90% of the labor for services contracts is performed at the approved EZA work site(s). To receive a contract award based on preferences, the company must certify under penalty of perjury that the required contract labor shall be accomplished at the approved work site.

Companies qualifying for the 5 percent work site preference may request an additional 1 to 4 percent workforce preference by certifying to hire a specified percent of their contract workforce labor hours from a targeted employment area, or from enterprise zone eligible employees.

For more information on preference points on state contracts visit the Department of General Services website www.dgs.ca.gov.

To learn more about how the SISKIYOU ENTERPRISE ZONE can help your business visit the website at www.siskiyouenterprisezone.org or call 530.842.1638.

The First-Time Homebuyer Credit (Revisited)

By Tessa Montgomery of Aiello-Goodrich-Teuscher

Over the past two years, the First-Time Homebuyer Credit (FTHBC) has had many different meanings. In 2008, the credit was an interest free loan for up to $7,500 to be paid back by the taxpayer in equal installments over 15 years. At first, people looking to buy their first home considered this a fairly nice incentive; that is until the new FTHBC for 2009 came out.

The current FTHBC for tax year 2009 offers the smaller of $8,000 ($4,000 if married filing separately) or 10% of the purchase price of the home for qualifying taxpayers that usually does not need to be paid back. The requirements are as follows:

• The home was purchased after December 31, 2008 and before May 1, 2010 (this gives the purchaser until July 1, 2010 to close).
• The taxpayer (and spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.
• The home cannot be acquired by gift or inheritance.
• The home cannot be acquired from a related person.
• The home must be purchased in the United States.
• The purchase price of the home cannot exceed $800,000.
• The AGI of the taxpayer cannot exceed $95,000 ($170,000 if married filing jointly) if the home was purchased before November 7, 2009.
• The AGI of the taxpayer cannot exceed $145,000 ($245,000 if married filing jointly) if the home was purchased on November 7, 2009 – May 1, 2010.

If the taxpayer meets all of the above requirements and is claiming the credit on the 2009 tax return, the following is required when filing:

• Form 5405 (First-Time Homebuyer Credit) must be completed and turned in with the 1040.
• A copy of the settlement statement showing all the parties’ names and signatures, the property address, sales price and date of purchase.
• The tax return cannot be e-filed. The 1040, 5405 and settlement statement must be paper-filed, or physically sent into the IRS for proper submission.

Although the requirements can seem confusing, this is a great opportunity for taxpayers looking to, or have recently purchased a new home, and should be taken advantage of. There is also a credit available for long-time homeowners looking to purchase a new home.

Dollars for dishwashers

By Lynn Teuscher of Aiello-Goodrich-Teuscher

A few months ago, the federal government had a program called “Cash for Clunkers,” which gave rebates to the auto dealers for sales of energy efficient vehicles purchased by the consumers. Coming soon to consumers in late 2009 or early 2010 will be a federally-funded program run by each individual state to give rebates on purchases of “Energy Star” appliances; sort of a “Cash for Clunker Appliances” program.   The rebates will commonly range from $50 to $250 depending on the product being purchased.

The “Stimulus Bill” (American Recovery and Reinvestment Act) provided $300 million to states for consumer rebates on the following ENERGY STAR qualified appliances:

• Central air conditioners
• Heat pumps (air source and geothermal)
• Boilers
• Furnaces (oil and gas)
• Room air conditioners
• Clothes washers
• Dishwashers
• Refrigerators/freezers
• Water heaters

This appliance stimulus rebate is different than the recent “Cash for Clunker” vehicle program in that the federal government is not doing the paperwork for each consumer transaction, instead they have asked the individual states to run the program, and the federal government will fund it. Each state has been given the authority to decide which appliances and what level of efficiency of that category of appliances will be eligible for rebates. The states were required to submit their plans to the Federal Department of Energy by October 15, 2009 for review. The manufacturers of appliances are concerned that it will be very difficult for them to have their products ready for 50 different state strategies in the upcoming months.

Dollars for dishwashers and other appliances are coming soon, so keep in contact with your appliance dealer for further details.