Newsletter

Think Twice Before Tossing:  The Critical Timing for Disposing of Your Tax Records Safely 

Now that your taxes are complete and filed for last year, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records …

Now that your taxes are complete and filed for last year, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place. Generally, we keep “tax” records for several reasons: 

Audit Defense: In the event of an IRS audit, taxpayers are required to present documentation supporting the claims made on their tax returns. Without proper records, defending against audit adjustments becomes significantly challenging.

Amending Returns: If taxpayers need to amend a return due to discovered errors or overlooked deductions, having detailed records makes the process smoother and ensures that all adjustments are accurate.

Claiming Refunds: For claiming refunds, especially those related to overpaid taxes, detailed records are necessary to substantiate the claim.

Tax Basis: When capital assets, such as stock, business assets, rentals and other investments are disposed of it is necessary to determine for tax purposes if there was a gain or loss from the transaction. The tax basis is what the asset cost plus or minus adjustments such as the cost of improvements which increase the tax basis, depreciation (reduces basis), casualty losses, or tax credits which decrease the tax basis. 

Duration for Keeping Tax Records – The general rule of thumb is to keep tax records until the statute of limitations for the tax return in question expires. The statute of limitations is the period during which the taxpayer can amend their tax return to claim a credit or refund, or the IRS can assess additional tax. 

Federal Statute of Limitations on Tax Refunds: The statute of limitations on tax refunds is a set of rules defined by the Internal Revenue Code that determines the time frame within which a taxpayer can claim a credit or refund for overpaid taxes. This statute serves two main purposes:

  • It specifies how long an individual has to file a claim for a refund or an amended return after the original return was filed or the tax was paid.
  • It sets limits on the amount of refund or credit that can be claimed, based on certain conditions.

    Some states have longer statutes, typically 4 years, so they have more time to piggyback on any federal audits and adjustments.

    Example: Sue filed her 2023 tax return before the due date of April 15, 2024. She will be able to safely dispose of most of her records after April 15, 2027. On the other hand, Don files his 2023 return on June 2, 2024. He needs to keep his records at least until June 2, 2027. In both cases, the taxpayers should keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

Tax Return Omissions: In certain situations, such as when a taxpayer does not report income that they should report, and it is more than 25% of the gross income shown on the return, the IRS suggests keeping records for six years.

Of course, the statute doesn’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return to evade tax.

Indefinite Retention: For records related to property, the IRS recommends keeping them for as long as the property is owned and for at least three years after filing the return reporting the sale or other disposition of the property. This is crucial for calculating depreciation, amortization, or gains or losses on the property.

Financially Disabled – Additionally, the time periods for claiming a refund are suspended for taxpayers who are “financially disabled”. A taxpayer is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. For a joint income tax return, only one spouse need be financially disabled for the time to be suspended. However, a taxpayer is not treated as financially disabled during any period their spouse, or any other person, is authorized to act on their behalf in financial matters. 

The Big Problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets such as stocks, bonds, and real estate. These documents need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category: 

Stock Acquisition Data — If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale. And if the result of those sales, and sales of other capital assets, is a loss that you’ll be carrying forward to future tax returns – loss exceeds $3,000 ($1,500 if filing as married separate) – keep the purchase and sale records for four years after filing the return on which the last of the loss is used up.

Stock and Mutual Fund Statements — Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements for at least four years after the final sale.

Tangible Property Purchase and Improvement Records — Keep records of home, investment, rental property or business property acquisitions, AND related capital improvements for at least four years after the underlying property is sold.

In addition, if you own a business that has a loss that creates a net operating loss (NOL) that you’ll be carrying forward to deduct in future years, you should keep all the business’s records that substantiate income and expenses from the loss year for at least four years after filing the return on which the NOL deduction is used up. 

The 10-Year Statute of Limitations on Collections – Although this has nothing to do with the theme of his article, “how long does the IRS have to collect unpaid tax?” is an often-asked question. The tax code puts a 10-year limit on the time period the IRS can pursue the collection of a tax debt. This statute of limitations begins from the date the tax was assessed and not from the tax year for which the debt was incurred. Understanding this limitation is crucial for taxpayers for several reasons: 

Collection Activities: The IRS has various collection activities at its disposal, including tax liens, levies, and wage garnishments. However, these activities are bound by the 10-year statute of limitations.

Installment Agreements: When a taxpayer owes federal tax and can’t immediately pay it, they may enter into an installment payment agreement with the IRS. In this case the clock on the 10-year statute does not stop. This means the IRS must collect the full amount owed within the original 10-year period unless specific conditions extend this period.

Have questions about whether to retain certain records? Give one of our offices a call before tossing out those documents. It is better to be sure before discarding something that might be needed down the road.

Living Below Your Means:  A Key to Entrepreneurial Success

Starting a business is a thrilling adventure, filled with dreams of innovation, independence, and financial success. However, the reality of entrepreneurship often involves long hours, relentless challenges, and financial uncertainty. As tax and accounting professionals, we have seen firsthand the struggles that startups face. One of the most critical lessons for new entrepreneurs is …

Starting a business is a thrilling adventure, filled with dreams of innovation, independence, and financial success. However, the reality of entrepreneurship often involves long hours, relentless challenges, and financial uncertainty. As tax and accounting professionals, we have seen firsthand the struggles that startups face. One of the most critical lessons for new entrepreneurs is understanding the importance of living below your means to ensure the growth and sustainability of your business.

The Harsh Reality of Business Failures

Let’s start with some sobering statistics. According to the U.S. Bureau of Labor Statistics, approximately 20% of new businesses fail within the first year, and about 50% fail by their fifth year. These numbers can be daunting, but they highlight the importance of careful financial planning and prudent spending.

The Temptation to Overspend

It’s natural to feel a sense of accomplishment and entitlement when you finally launch your own business. After all, you’ve taken a significant risk and invested countless hours into making your dream a reality. However, this sense of achievement can sometimes lead to the temptation to pay yourself a hefty salary or indulge in luxuries your business can’t yet afford.

The Importance of Living Below Your Means

Living below your means is a concept that applies to personal finance, but it’s even more crucial for entrepreneurs. Here’s why:

  1. Cash Flow Management: Cash flow is the lifeblood of any business. By keeping your personal expenses low, you can ensure that more money stays within the business, allowing you to reinvest in growth opportunities, cover unexpected expenses, and weather financial downturns.
  2. Investor Confidence: If you’ve raised outside capital, your investors expect you to be a good steward of their money. Paying yourself an exorbitant salary can erode their confidence and potentially jeopardize future funding rounds. Demonstrating financial discipline shows that you are committed to the long-term success of the business.
  3. Sustainable Growth: Rapid growth can be exciting, but it can also be risky if not managed properly. Living below your means allows you to grow your business at a sustainable pace, ensuring that you have the resources to support expansion without overextending yourself financially.

Practical Tips for Living Below Your Means

  1. Set a Modest Salary: Determine a reasonable salary for yourself based on your business’s financial health and industry standards. Remember, your goal is to ensure the business’s survival and growth, not to maximize your personal income in the short term.
  2. Separate Personal and Business Finances: Keep your personal and business finances separate to avoid the temptation to dip into business funds for personal expenses. This also simplifies accounting and tax reporting.
  3. Create a Budget: Develop a detailed budget for both your personal and business expenses. Track your spending meticulously and look for areas where you can cut costs.
  4. Reinvest Profits: Instead of taking large distributions, reinvest profits back into the business. This could mean upgrading equipment, hiring additional staff, or expanding your marketing efforts.
  5. Plan for the Future: Build an emergency fund for your business to cover unexpected expenses or downturns. This financial cushion can provide peace of mind and stability during challenging times.

Road to Success

Being an entrepreneur is not just about having a great idea or a passion for your industry. It’s about making smart financial decisions that ensure the longevity and success of your business. By living below your means, you can create a solid foundation for growth, maintain investor confidence, and navigate the inevitable ups and downs of entrepreneurship.

Remember, the sacrifices you make today can lead to greater rewards in the future. Stay disciplined, stay focused, and keep your eye on the long-term vision for your business. Your future self—and your business—will thank you.

Get Those Kids a Job: The Tax Advantages of Securing Summer Jobs for Your Children

Children who are dependents of their parents are subject to what is commonly referred to as the kiddie tax. This generally applies to children under the age of 19 and full-time students over the age of 18 and under the age of 24.The kiddie tax originated many years ago as a means to close …

Children who are dependents of their parents are subject to what is commonly referred to as the kiddie tax. This generally applies to children under the age of 19 and full-time students over the age of 18 and under the age of 24.

The kiddie tax originated many years ago as a means to close a tax loophole where parents would put their investments under their child’s name and social security number so that their investment income would be taxed at lower tax rates. Enter the kiddie tax, under which unearned income (investment income) more than a minimum amount is taxed at the parent’s highest marginal tax rate.

Tax-Free Income – On the bright side, a child’s earned income (income from working) is taxed at single rates, and the standard deduction for singles is $14,600 for 2024. This means that your child can make $14,600 from working and pay no income tax (but will be subject to Social Security and Medicare payroll taxes), and if the child is willing to contribute to a traditional IRA, for which the 2024 contribution cap is $7,000, the child can make $21,600 from working—federal income tax free.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you, a grandparent, or others have the financial resources, the amount of an IRA contribution could be gifted to the child, giving your child a great start toward their retirement savings and hopefully a continuing incentive to save for their retirement.

Employing Your Child – If you are self-employed (an unincorporated business), a reasonable salary paid to your child reduces your self-employment (SE) income and your income tax by shifting income to the child.

For 2024, when a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is upward of $2,600. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,300 standard deduction. However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $400 or the regular standard deduction for the year, which is $14,600. If a child has no other income, the child could be paid $14,600 and incur no income tax. If the child is paid more, the next $11,600 he or she earns is taxed at 10%.

Example: You are in the 22% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,500 for the year. You reduce your income by $16,500, which saves you $3,630 of income tax (22% of $16,500), and your child has a taxable income of $1,900 ($16,500 less the $14,600 standard deduction) on which the tax is $190 (10% of $1,900). The net income tax saved by the family is $3,440 ($3,630 – $190).

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.

Example: Using the same circumstances as the example from above, and assuming your business profits are $180,000, by paying your child $16,500, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $442 (2.9% of $16,500 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($168,600 for 2024) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion, $1,889 (12.4% of $16,500 x 92.35%), in addition to the 2.9% HI portion for a total savings of $2,331 ($442 + $1,889).

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by their parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of the child’s parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings – Additional savings are possible if the child is paid more and deposits the extra earnings into a traditional IRA. For 2024, the child can make a tax-deductible contribution of up to $7,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction of $14,600 and the maximum deductible IRA contribution of $7,000 for 2024, a child could earn $21,600 of wages and pay no income tax.

However, referring back to our original example, the child’s tax to be saved by making a $7,000 traditional IRA contribution is only $190, so it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $190 savings.

If you have questions about the information provided here and other possible tax benefits or issues related to hiring your child, please give one of our offices a call.

Farm Tax Deductions and Planning Strategies for 2024

As the harvest season winds down and you plan for the coming year, optimizing your tax strategies should be a key focus. By leveraging specific farm tax deductions, you can significantly reduce your taxable income and preserve working capital.

Key Considerations for Effective Tax Planning

Business Classification: Ensure your farm qualifies as a business for tax …

Digital Acreage Reporting is Here

USDA Modernizes Acreage Reporting with Electronic Submissions

Nebraska farmer Quentin Connealy has ditched traditional paper maps and crayons for a more efficient digital system to file his mandatory acreage reports for crop insurance and the Farm Services Agency (FSA). This shift to electronic submissions not only saves time but also reduces costs and improves accuracy.

Embracing …

Exciting News for Michigan Blueberry Growers: Enhanced Crop Insurance Options Announced

Great news for Michigan blueberry farmers! The U.S. Department of Agriculture (USDA) has unveiled improved crop insurance options, set to provide substantial benefits to blueberry growers in the state.

Currently, Michigan is one of the largest blueberry producers in the U.S., supplying millions of pounds each year. However, the existing one-size-fits-all insurance model has not …

Should You Put Out a Statement?

The decision to issue a public statement in response to a major news event can be daunting for nonprofit communication professionals, especially when internal disagreements run deep. With divisive issues increasingly dominating headlines and the looming specter of the 2024 presidential election, organizations must navigate these challenges with clarity and intentionality. Internal Clarity Matters …

The decision to issue a public statement in response to a major news event can be daunting for nonprofit communication professionals, especially when internal disagreements run deep. With divisive issues increasingly dominating headlines and the looming specter of the 2024 presidential election, organizations must navigate these challenges with clarity and intentionality.

Internal Clarity Matters

Before crafting a response, organizations must first establish clarity internally. This involves defining the organization’s stance on the issue at hand, understanding the tolerance range for differing viewpoints, and developing an advocacy strategy. These elements are interrelated but distinct, requiring careful consideration to avoid confusion and circular discussions.

Stance, Tolerance Range, and Advocacy Strategy

Every organization holds a stance on issues, whether explicit or implicit. Additionally, organizations have a tolerance range that delineates acceptable variations of opinion both internally and externally. Finally, organizations must deliberate on their advocacy strategy, determining how and when to engage with the issue at hand. Crafting a deliberate strategy ensures that responses are purposeful and aligned with organizational values.

Normalize Ideological Diversity

To foster productive dialogue amidst ideological differences, organizations must prioritize building a culture of respect and understanding. This requires intentional efforts to promote open-mindedness, empathy, and constructive discourse within the workplace. By practicing respectful engagement across diverse perspectives, organizations can navigate contentious issues with integrity and resilience.

In a landscape fraught with political tensions and societal upheaval, the ability to navigate controversy is essential for nonprofit communication professionals. By fostering internal clarity and embracing ideological diversity, organizations can effectively communicate their values while maintaining cohesion and purpose.

To learn more about how your organization can strategize over responding to polarizing world events, click here.

Anti-DEI Lawsuits Threaten Nonprofits

As the landscape of diversity, equity, and inclusion (DEI) initiatives evolves, nonprofits and philanthropies are facing a new wave of legal challenges. These lawsuits, spearheaded by conservative activists, aim to dismantle race-conscious practices across various institutional realms. The implications are profound, posing existential questions for organizations striving to balance their missions with legal risks. …

As the landscape of diversity, equity, and inclusion (DEI) initiatives evolves, nonprofits and philanthropies are facing a new wave of legal challenges. These lawsuits, spearheaded by conservative activists, aim to dismantle race-conscious practices across various institutional realms. The implications are profound, posing existential questions for organizations striving to balance their missions with legal risks.

The Shift in Legal Terrain

Following a 2023 Supreme Court ruling ending affirmative action in higher education, legal scrutiny has extended beyond academia to corporate diversity initiatives and now to the nonprofit and philanthropic sectors. Lawsuits targeting race-informed grantmaking processes, like those against Fearless Fund and Hidden Star, underscore a broader effort to challenge DEI measures in institutional practices and decision-making.

The Stakes for Nonprofits and Philanthropies

Legal battles are not just financially burdensome but also risk tarnishing an organization’s reputation in the media. Even organizations with strong legal footing face the dilemma of engaging in costly litigation and potentially exposing sensitive internal matters during the discovery process. As Ann O’Leary of Jenner & Block notes, many organizations grapple with the choice between standing firm on principle or capitulating to avoid legal entanglements.

Strategies for Mitigation

Amidst the uncertainty, proactive measures can help organizations navigate potential legal challenges. Conducting internal risk assessments and revisiting policies to mitigate vulnerabilities are crucial steps. Some may opt to refocus grantmaking efforts on economic disadvantage rather than race, though this shift may compromise the core mission of supporting marginalized communities. Ultimately, understanding and addressing these legal threats is imperative for the nonprofit sector’s resilience and efficacy in advancing DEI goals.

As legal battles persist and continue to evolve, nonprofits and philanthropies must remain vigilant, adapting strategies to safeguard their DEI efforts while upholding their missions of social justice and inclusion.

Click here to read more about what your organization can do to prepare for potential litigation.

Ten Nonprofit Funding Models

In the nonprofit sector, discussions about money are constant, with leaders often grappling with questions about how much funding they need, where to find it, and why there isn’t more available. Especially in challenging economic climates, these concerns become even more urgent. Unfortunately, clear answers to these questions are often elusive. Nonprofit leaders tend …

In the nonprofit sector, discussions about money are constant, with leaders often grappling with questions about how much funding they need, where to find it, and why there isn’t more available. Especially in challenging economic climates, these concerns become even more urgent. Unfortunately, clear answers to these questions are often elusive. Nonprofit leaders tend to excel in program creation but struggle with funding their organizations effectively. Similarly, philanthropists may find it challenging to grasp the full impact and limitations of their donations.

This lack of financial clarity has significant consequences. When funding sources and nonprofits are not well-aligned, resources may not flow to areas where they could have the most significant impact. This can result in promising programs being cut, scaled back, or never launched at all. Moreover, when financial resources are scarce, organizations often find themselves in chaotic fundraising scrambles.

In contrast to the nonprofit world, the for-profit sector typically exhibits a higher degree of financial clarity, often articulated through business models. These models provide shorthand for understanding how different businesses operate and their strategies for success. Investors and executives can engage in sophisticated conversations about a company’s approach based on these models, enhancing the likelihood of success and profitability.

However, the nonprofit sector lacks similarly clear and succinct conversations about long-term funding strategies. The various types of funding available to nonprofits have never been clearly defined, leading to a lack of understanding and clear thinking.

Through research, ten nonprofit models commonly used by large nonprofits in the United States have been identified. Rather than prescribing a single approach, the goal is to help nonprofit leaders articulate their organization’s models more clearly. This understanding can then be used to assess the potential and constraints associated with each model, ultimately supporting organizational growth.

For more information on these 10 nonprofit funding models, click here to read the full article.

The Cost of Going Green for Nonprofits

In today’s landscape, the shift towards eco-conscious practices is palpable across all sectors, including nonprofits. From embracing digital alternatives to reducing carbon footprints, organizations are increasingly under pressure to demonstrate environmental responsibility. Yet, amidst the push for sustainability, questions arise: What are the implications for nonprofits, and how can they make this transition without …

In today’s landscape, the shift towards eco-conscious practices is palpable across all sectors, including nonprofits. From embracing digital alternatives to reducing carbon footprints, organizations are increasingly under pressure to demonstrate environmental responsibility. Yet, amidst the push for sustainability, questions arise: What are the implications for nonprofits, and how can they make this transition without succumbing to greenwashing?

Growing Public Concerns

As environmental consciousness permeates consumer behavior, donors are scrutinizing nonprofits’ environmental stances. The rise of the eco-friendly donor underscores the importance of sustainability in organizational ethos. Studies reveal a significant portion of donors prioritizing sustainability in their contributions, signaling a seismic shift in charitable giving trends.

Actions and Their Costs

Even for nonprofits not inherently focused on environmental causes, adopting green practices is not only feasible but imperative. Simple steps, like eliminating paper waste or transitioning to virtual platforms, can yield substantial environmental benefits while enhancing operational efficiency. However, such transitions may entail initial financial investments.

Going Green Online

The COVID-19 pandemic catalyzed the transition to online platforms, reshaping fundraising landscapes. Embracing digital fundraising not only ensures organizational resilience but also aligns with environmentally conscious practices. Additionally, remote work arrangements reduce carbon emissions and promote inclusivity, catering to diverse workforce needs.

Combatting Greenwashing

In an era of heightened environmental awareness, stakeholders are increasingly vigilant against greenwashing tactics. Genuine engagement with local environmental initiatives and transparent communication are essential in building credibility and trust. For nonprofits, aligning with authentic environmental causes reinforces their societal value and fosters community goodwill.

While the journey towards sustainability may pose financial challenges, nonprofits cannot afford to ignore the environmental imperative. Embracing green practices not only aligns with donor expectations but also reinforces organizational integrity. As stewards of public trust, nonprofits must navigate the green transition with diligence, recognizing its profound impact on both mission delivery and community engagement.

For more information on the cost of going green, click here to read the full article.