Tax

If you filed for an extension of time to file your 2015 federal tax return and you also chose to have advance payments of the premium tax credit made to your coverage provider, it’s important you file your return sooner rather than later. Here are four things you should know:

1. If you received a six-month extension of time to file, you do not need to wait until the October 17, 2016, due date to file your return and reconcile your advance payments. You can–and should–file as soon as you have all the necessary documentation.

2. You must file to ensure you can continue having advance credit payments paid on your behalf in future years. If you do not file and reconcile your 2015 advance payments of the premium tax credit by the Marketplace’s fall re-enrollment period–even if you filed for an extension–you may not have your eligibility for advance payments of the PTC in 2017 determined for a period of time after you have filed your tax return with Form 8962.

3. Advance payments of the premium tax credit are reviewed in the fall by the Health Insurance Marketplace for the next calendar year as part of their annual re-enrollment and income verification process.

4. Use Form 8962, Premium Tax Credit, to reconcile any advance credit payments made on your behalf and to maintain your eligibility for future premium assistance.

Questions?

If you have any questions about filing an extended return, help is just a phone call away.

• By Leon Clinton
• September 16, 2016

Now is a great time to clean out that growing mountain of financial papers and tax documents that clutter your home and office. Here’s what you need to keep and what you can throw out.

Let’s start with your “safety zone,” the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.

The concept behind it is that after a period of years, records are lost or misplaced, and memory isn’t as accurate as we would hope. There’s a need for finality. Once the statute of limitations has expired, the IRS can’t go after you for additional taxes, but you can’t go after the IRS for additional refunds, either.

The Three-Year Rule

For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you’re looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:

• If you don’t report all your income, and the unreported amount is more than 25 percent of the gross income actually shown on your return, the limitation period is six years.
• If you’ve claimed a loss from a worthless security, the limitation period is extended to seven years.
• If you file a “fraudulent” return or don’t file at all, the limitations period doesn’t apply. In fact, the IRS can go after you at any time.
• If you’re deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.

Assuming that you’ve filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.

Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.

Here’s a checklist of the documents you should hold on to:

1. Capital gains and losses. Your gain is reduced by your basis – your cost (including all commissions) plus, with mutual funds, any reinvested dividends, and capital gains. But you may have bought that stock five years ago, and you’ve been reinvesting those dividends and capital gains over the last decade. And don’t forget those stock splits.

   You don’t ever want to throw these records away until after you sell the securities. And then if you’re audited, you’ll have to prove those numbers. Therefore, you’ll need to keep those records for at least three years after you file the return reporting their sales.

2. Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It’s just good practice, even though most homeowners won’t face any tax problems. That’s because profit of less than $250,000 on your home ($500,000 on a joint return) isn’t subject to capital gains tax.

   If the profit is more than $250,000 ($500,000 joint filers) or if you don’t qualify for the full gain exclusion, then you’re going to need those records for another three years after that return is filed. Most homeowners probably won’t face that issue, but of course, it’s better to be safe than sorry.

3. Business records. Business records can become a nightmare. Non-residential real property is depreciated over a period of 39 years. You could be audited on the depreciation up to three years after you file the return for the 39th year. That’s a long time to hold onto receipts, but you may need to validate those numbers.
4. Employment, bank, and brokerage statements. Keep all your W-2s, 1099s, brokerage, and bank statements to prove income until three years after you file. And don’t even think about dumping checks, receipts, mileage logs, tax diaries, and other documentation that substantiate your expenses.
5. Tax returns. Keep copies of your tax returns as well. You can’t rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for six years. The bottom line is that you’ve got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.
6. Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they’re wrong, you’ll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don’t dispose of those records until after you’ve validated those contributions.

   Contact the office by phone or email if you have any questions about which tax and financial records you need to keep this year.

• By Leon Clinton
• September 14, 2016

Tax breaks for charitable giving aren’t limited to individuals, your small business can benefit as well. If you own a small to medium size business and are committed to giving back to the community through charitable giving, here’s what you should know.

1. Verify that the Organization is a Qualified Charity.

Once you’ve identified a charity, you’ll need to make sure it is a qualified charitable organization under the IRS. Qualified organizations must meet specific requirements as well as IRS criteria and are often referred to as 501(c)(3) organizations. Note that not all tax-exempt organizations are 501(c)(3) status, however.

There are two ways to verify whether a charity is qualified: use the IRS online search tool or ask the charity to send you a copy of their IRS determination letter confirming their exempt status.

2. Make Sure the Deduction is Eligible

Not all deductions are created equal. In order to take the deduction on a tax return, you need to make sure it qualifies. Charitable giving includes the following: cash donations, sponsorship of local charity events, in-kind contributions such as property such as inventory or equipment.

Lobbying. A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks the loss of its tax-exempt status. As such, you cannot claim a charitable deduction (or business expense) for amounts paid to an organization if both of the following apply.

• The organization conducts lobbying activities on matters of direct financial interest to your business.
• A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses.

Further, if a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues.

3. Understand the Limitations

Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.

Note: Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Likewise, if the payments are charitable contributions or gifts, you cannot deduct them as business expenses.

Sole Proprietorships

As a sole proprietor (or single-member LLC), you file your business taxes using Schedule C of individual tax form 1040. Your business does not make charitable contributions separately. Charitable contributions are deducted using Schedule A, and you must itemize in order to take the deductions.

Partnerships

Partnerships do not pay income taxes. Rather, the income and expenses (including deductions for charitable contributions) are passed on to the partners on each partner’s individual Schedule K-1. If the partnership makes a charitable contribution, then each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has four equal partners and donates a total of $2,000 to a qualified charitable organization in 2016, each partner can claim a $500 charitable deductions on his or her 2016 tax return.

Note: A donation of cash or property reduces the value of the partnership. For example, if a partnership donates office equipment to a qualified charity, the office equipment is no longer owned by the partnership and the total value of the partnership is reduced. Therefore, each partner’s share of the total value of the partnership is reduced accordingly.

S-Corporations

S-Corporations are similar to Partnerships, with each shareholder receiving a Schedule K-1 showing the amount of charitable contribution.

C-Corporations

Unlike sole proprietors, Partnerships and S-corporations, C-Corporations are separate entities from their owners. As such, a corporation can make charitable contributions and take deductions for those contributions.

4. Categorize Donations

Each category of donation has its own criteria with regard to whether it’s deductible and to what extent. For example, mileage and travel expenses related to services performed for the charitable organization are deductible but time spent on volunteering your services is not. Here’s another example: As a board member, your duties may include hosting fundraising events. While the time you spend as a board member is not deductible, expenses related to hosting the fundraiser such as stationery for invitations and telephone costs related to the event are deductible.

Generally, you can deduct up to 50 percent of adjusted gross income. Non-cash donations of more than $500 require completion of Form 8283, which is attached to your tax return. In addition, contributions are only deductible in the tax year in which they’re made.

5. Keep Good Records

The types of records you must keep vary according to the type of donation (cash, non-cash, out of pocket expenses when donating your services) and the importance of keeping good records cannot be overstated.

Most organizations will give you a letter stating it received a contribution from your business, but you should still keep canceled checks, bank and credit card statements, and payroll deduction records as proof or your donation in case of an IRS audit.

If you’re a small business owner, don’t hesitate to call if you have any questions about charitable donations.

• By Leon Clinton
• September 11, 2016