Tax Tips Archives - Postema Accounting Solutions

How Long Do You Need to Keep Your Tax Returns?

Most taxpayers are typically afraid to throw statements, income tax returns and other documentation away due to the fear of potentially needing the information and not having it available. Keeping confidential information beyond the required length of time is risky as it poses a definite security risk. A taxpayer who has boxes and boxes of documentation takes the chance that this information will be accessed and then used by an unscrupulous individual. Plus having an excessive amount of paper documentation presents a definite fire hazard.

The general rule of thumb according to the Internal Revenue Service (IRS) is most individual tax returns may be shredded three years from the date they were filed. The three year rule is based on the general Period of Limitations during which the IRS has the right to review or audit your income tax return. The Period of Limitations is also the period of time in which a return may be amended and the IRS can assess additional tax. Along with keeping a copy of your tax return, you should keep all the documentation supporting and verifying the figures on the return.

There are exceptions to this three year rule based on different scenarios. For example, if you did not report income you should have and it is more than 25% of the gross income you did report on your return you need to keep a copy of your income tax return and all supporting documentation for six years. If you filed a claim for a loss from a worthless security, you need to keep that return along with all the documentation for seven years.

If however, you filed a fraudulent return or simply neglected to file a return there is no limit on the length of time you need to keep any information you have pertaining to that income tax return. In these scenarios, the IRS can request any information or audit you for the time period in question at any time. With the IRS having the ability to audit and assess penalties, interest and taxes for an indefinite period of time with the last two scenarios, the general consensus is to file your income tax return accurately and in a timely manner thus avoiding having to continually being afraid of being caught and punished. Isn’t filing a timely accurate income tax return sounding much better than continually having to look over your shoulder waiting to be audited!! In my opinion, it certainly is a better option.

Submitted by Kathryn Shrader

Is the Travel Associated with Your Charity Work Deductible?

by Kathy Shrader Leave a Comment

Do you invest considerable time travelling when you perform your charity work? If so depending upon the circumstances, your travel expenses may be deductible. There are several criteria which must be met before an individual is able to deduct his or her mileage.

First, the charity where you volunteer your time or perform your services must be a recognized non-profit organization. If you are uncertain, ask the charity about its qualifications and maintain this proof in your tax documents. If the government has granted the charity a tax-exempt status, any mileage you incur while volunteering is deductible. Unfortunately, the value of your time or the value of any services you perform for the charity is not deductible, just any unreimbursed travel expenses.

Additionally, the travel mileage you deduct cannot involve any travel spent on vacation, recreation, or personal pleasure you derive from the activity although hopefully you will enjoy your charity work.

If you are involved in extended travel, your charity work must be significant, real, and substantial throughout the entire trip in order for your travel mileage to be deductible. If you travel a great distance and spend very little time conducting charity work, the mileage is not deductible as charity mileage.

There are other expenses which also may be included in any deductible travel expenses. These include any required air, rail, and bus transportation. If the means of transportation is an automobile, any car expenses associated with your charity work may be deducted. These would include any parking fees and toll road costs.

Also, if your charity work requires an overnight stay or several overnight stays, your lodging costs may be deductible. The cost of any meals while you are away from home would also be deductible as well as any taxi fees or other transportation costs you might incur between the charity site and an airport, bus station or your hotel. But remember, the charity work you perform must be substantial and must encompass a majority of your time before you may deduct any associated expenses.

Any travel expenses you are able to deduct is an added bonus to the pleasure you obtain from volunteering your time and services – just make sure you keep accurate records and can verify any deductions you might take for your volunteering expenses.

Submitted by Kathryn Shrader

Are the Meals and Entertainment Your Employer Provides Taxable?

by Kathy Shrader Leave a Comment

If your employer provides such benefits as meals and entertainment, do you have to keep track and are they taxable? Unfortunately, there are numerous complicated rules dictating whether these benefits are taxable or not. Some of these rules are:

If your employer periodically provides supper money if you need to work late, it is tax free unless it becomes a frequent occurrence and then it’s taxable.
If entertainment allowances are used strictly for business purposes, they are not taxable but if used for personal entertainment they do become taxable.
Company provided parties and picnics are considered tax free if the employer only sponsors them on an occasional basis.
Executive dining rooms may be considered tax free if the purpose of eating on company grounds is for the convenience of the employer and not the employee. Additionally, if the employee would be able to consider the meal cost a valid business expense the meal provided in the executive dining rooms would be tax free.
Company cafeterias are considered tax free if they are available to all the different levels of employees, not just upper management, the top executives, owner-employees and the higher paid. Although, any revenue generated must be used to cover operating expenses or it becomes taxable.
Any meals and lodging if provided on employer’s premises and are for the employer’s benefit rather than the employee’s are tax free. Additionally, these expenses are totally deductible by the employer.
Club memberships are taxable unless its use is strictly for business purposes but the employer can treat the membership dues expense as compensation to the employee.

While these regulations initially appear complex, by evaluating each employer provided meal or entertainment benefit it should be relatively easy to determine if you, as an employee, need to keep records for tax purposes. If the employer determines these benefits are taxable, it is their obligation to provide the documentation of any taxable benefits for you to use in preparing your income tax return. If you determine the benefits are tax free enjoy them! But if you determine they are taxable, keep records, pay the tax but still enjoy the benefits!

Submitted by Kathryn Shrader

In the Eyes of the IRS is Your Activity a Business or a Hobby?

by Kathy Shrader Leave a Comment

According to the Internal Revenue Service (IRS), many taxpayers incorrectly classify a hobby as a business. These taxpayers then deduct expenses associated with the incorrectly classified activity resulting in approximately $30 billion per year in unpaid taxes. Intending to make a profit versus conducting the activity strictly for pleasure is what differentiates these activities according to IRS regulations.

The following questions should be addressed to determine if your activity should be classified a business or a hobby:

Do you put time and effort into the activity with the intent to make a profit or do you conduct the activity only for pleasure?
Do you depend on the income from the activity?
Do you have or do you intend to gain the expertise needed to conduct the activity in a manner to show a profit?
Have you made a profit in the past with similar activities?
Has your activity made a profit in some years and do you expect to make a profit in the future?
If there are losses, are they due to circumstances beyond your control or during the start- up years with your business and are you willing to change your method of operation in order to show a profit?

If you are able to answer these questions positively, then generally in the eyes of the IRS your activity is a business and you may deduct the associated expenses from the activity’s income within IRS regulations. Consequently, any losses from your business activity may be used to offset other income, again within IRS regulations.

In addition to the intent to make a profit, typically the IRS views any activity that makes a profit during three of the last five years to be a business. If activities which consist primarily of breeding, showing, training or racing horses show a profit for two years of the last seven, the IRS considers the activity to be a business.

Carefully examine the intent for your activity to determine its classification before deducting any losses against other income as the IRS is reviewing small business losses more carefully.

Submitted by Kathryn Shrader

Can I Claim An Exemption if My Girlfriend/Boyfriend Lives with Me?

by Kathy Shrader Leave a Comment

Your girlfriend (boyfriend) has lived with you the entire year and you have supported her (him) so can you claim her (him) on your income tax return? According to the Internal Revenue Service (IRS) there are several tests which must be met before an individual can be claimed as a dependent. If your friend passes four qualifications or tests you may claim an exemption thus saving you money on your income taxes. In order to claim someone who is not your blood relative as a dependent, all of the following must be true:

You must have provided more than 50% of her or his financial support.
Your girlfriend (boyfriend) must have lived in your home all year.
Your friend must be a citizen of the United States, or a resident of the U.S., Canada or Mexico
Your friend must have earned less than $3,950 in 2014

If your girlfriend (boyfriend) meets all of these requirements you may claim your friend as a dependent on your income tax return thus reducing your taxable income by $3,950. Additionally, if all of the tests are met, to properly complete your income tax return you will need your friend’s legal name, date of birth and social security number.

One important fact to remember is that even if your girlfriend (boyfriend) qualifies as your dependent does not mean you may file as Head of Household. According to the IRS for Head of Household purposes she (he) is not your qualifying person as your girlfriend (boyfriend) does not meet the specifications of a relative who does not live you. There are a complete different set of regulations a dependent must meet in order to be a qualifying person for the Head of Household status and unfortunately your friend does not meet the relationship test. Therefore, unless you have another dependent who can be your qualifying person you will have to file as Single for your filing status.

Submitted by Kathryn Shrader

How Long Do You Need to Keep Your Tax Returns?

Is the Travel Associated with Your Charity Work Deductible?

Are the Meals and Entertainment Your Employer Provides Taxable?

In the Eyes of the IRS is Your Activity a Business or a Hobby?

Can I Claim An Exemption if My Girlfriend/Boyfriend Lives with Me?

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