RECORDKEEPING REQUIREMENTS
You’re probably getting ready to sort out last year’s financial records and prepare for this year’s recordkeeping. But what should you keep and what can you throw away? Here are some suggestions.
* Keep records that directly support income or expense items on your tax return. For income, this includes W-2s, 1099s, and Form K-1s. Also keep records of any other income you might have received from other sources. It’s also a good idea to save your bank statements and investment statements from brokers.
For expense items, keep documentation that supports any itemized deductions you claim. This includes acknowledgments from charitable organizations and backup for taxes paid, mortgage interest, medical deductions, work expenses, and miscellaneous deductions. Even if you don’t itemize, keep records of expenses for child care, medical insurance if you’re self-employed, and any other expenses that appear on your return.
The IRS can audit you routinely for three years after you file your return. But in cases where income is underreported, they can audit for up to six years. To be safe, keep your tax records for seven years.
Keep certain other records even longer. These include records relating to your house purchase and any improvements you make. Also keep records of investment purchases, dividends reinvested, and any major gifts you make or receive. And finally, keep copies of all your tax returns and W-2s in case you ever need to prove your earnings for social security purposes.
Please call our office if you have questions about specific items.
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Bring your corporate minutes up to date
Writing up the minutes of board of directors’ meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.
Minutes are especially important where any kind of related-party transactions occur, such as payments, loans, or distributions between the company and its owners. For example, the IRS may challenge the amount of compensation paid to a business owner as unreasonable. Corporate minutes that document the factors considered by the board in approving the compensation can be a strong defense against such a challenge.
Another area that receives close scrutiny from the IRS is the amount of earnings that are retained in the business rather than distributed as taxable dividends. A penalty applies to retained earnings over a certain limit unless they can be justified by business needs. Corporate minutes can be a strong piece of supporting evidence if they clearly spell out the reasons that the company needs to retain funds — for example, to purchase assets or for working capital.
If your company has a tax-qualified retirement plan or a stock option plan, the minutes should show decisions by the board adopting or modifying the plan. They should also document annual decisions on the percentage of contribution to profit-sharing plans and any decisions on fringe benefits, such as medical reimbursement accounts.
Corporate minutes need not be lengthy, but they should provide a clear record of corporate actions and the business factors that were considered when those actions were taken. You should think of your minutes as a key element of your tax planning strategy.
If your corporate minutes need updating, contact your attorney and take care of this important bit of business housekeeping.