By John Stylianou, Accountant
If you’re like many business owners, you have many records you’re not sure you need to keep anymore. Keeping more documents than necessary can be messy and confusing. On the other hand, not keeping enough can lead to trouble should you be audited by the IRS.
Every business owner needs to maintain adequate records to prepare his business tax return and to substantiate income and expenses in the event of an audit. Chances are you already have the heart of an efficient recordkeeping system in place by using computer software to keep your company’s books. Using software should reduce your office clutter since many reports don’t really need to be printed out. They can be viewed on your computer screen whenever you need them. Remember to keep a backup copy of your books in a safe place, like your home, in case disaster strikes.
Of course, the IRS does require support for your deductible business expenses. Often this will be purchase invoices along with proof of payment. Some types of expenses, such as meals and entertainment, do require extra documentation. If space is particularly scarce, you may want to consider using electronic storage alternatives.
It’s also important to save records that document the source of your business receipts — especially for receipts that shouldn’t be treated as income, such as loan proceeds. One technique the IRS uses in examinations is to obtain your bank statements and analyze the deposits. Properly documenting the source of each deposit will help ensure you don’t end up paying any more tax than necessary.
UNCLE SAM MAY HELP YOU RECOVER FROM A NATURAL DISASTER
Natural disasters seem to be occurring with increasing frequency, often leaving many people with severely damaged or destroyed homes and businesses. Some lose everything they own. If you are affected by a disaster, there are several provisions in the tax law that may provide relief.
Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing returns and paying taxes for up to 120 days in a Presidential declared disaster area. Also, the IRS will not charge interest that would otherwise accrue for the extension period.
Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it on the return for the year the loss occurs, or it can be claimed on your prior year’s tax return. Amending your prior year’s return may give you a refund of much-needed cash sooner than waiting to deduct the loss on your current year’s tax return.
Tax-free gain. If the insurance payments you receive exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:
– Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That’s because the destruction of the residence is treated as a “sale” for tax purposes.
– No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.
– If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.