Spring Cleaning Never Throw These Important Papers Away

Spring is a great time to clean out that growing mountain of financial papers and tax documents that clutters your home and office. Here's what you need to keep and what you can throw out without fearing the wrath of the IRS.

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.
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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% 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 get 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 taxes under tax legislation enacted in 1997.
   
   If the profit is more than $250,000/$500,000, 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 thanks to the 1997 tax law, but of course, it's better to be safe than sorry.
   
   
3. Business records. Business records can become a nightmare. Non-residential real estate is now depreciated over 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 on to 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 6 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 us by phone or email if you have any questions about what records you need to keep this spring.
   

QuickBooks and Double-Entry Accounting: Where’s the Other Side?

Bookkeeping is a little like physics – there are unbreakable rules. So to paraphrase one of them, “For every debit, there is an equal and opposite credit.” But in QuickBooks, that is not always obvious. The “implied side” of a transaction is not staring you in the face most of the time.

The balancing side of every transaction is there nonetheless, so that your general ledger zeroes out and your financial statements work as they are supposed to.

Where do you find the implied side of the transactions? Sometimes you want to know (or confirm) what the offsetting entry is behind the scenes. That’s where the Transaction Journal comes into play.

You can simply run the Reports / Accountant and Taxes / Journal report. It will show every transaction within the reporting date range (which you can change) and it will break out the debits and credits of every transaction into columns for the accounts that are affected.

In this example (which I split into different lines for viewability), Mr. Teschner made a payment against his customer account. You see the split in the Journal report: Checking account 10100 was debited (increased) by $5,000 and Accounts Receivable account 11000 was credited (decreased) by $5,000.

You can change the dates on this report to focus on a particular date or date range, or you can click Customize Report / Filters to limit the Journal report’s output to particular accounts you wish to see.

A faster way to pinpoint one particular transaction is to pull up the customer, vendor, employee, etc. in its respective Center.

Let’s say you want to see the implied side of an invoice that posted to a particular customer.

Go the Customer Center and click on the customer you want. You’ll see the customer’s transaction in the right-hand pane.

In this example, let’s say you want to see all the debits and credits associated with invoice 1024, the last transaction in the listing.

You just right-click on that transaction, and select “View Transaction Journal”, like this:

A new window will pop up with the debits and credits for that specific transaction. Here’s the rightmost columns of information in the window:

Nice! This is faster and easier than running the big Journal report and filtering down to this level. You see that the implied side of the transaction is listed first: accounts receivable. That’s the implied side of the invoice transaction.

This is a pretty obvious example. But in cases where you’re not sure what the offsetting debit or credit was, you have ways to find out.

Sourced from 

http://blog.quickbooksusers.com/quickbooks/quickbooks-and-double-entry-accounting-wheres-the-other-side/

QuickBooks Online Bookkeeping Cloud Style

There’s been much made of late about cloud computing. It seems more and more hardware and software vendors are shifting their focus (thereby ours as well) from local computing, to using software and data in the cloud. We’re used to buying a piece of software, installing it on one computer and working from there. The paradigm shift to cloud computing has us moving towards the idea of subscription-based software as a service (SaaS) instead. SaaS accounting systems are making headway in this realm as well. The Big Daddy of accounting software – Intuit – offers a lineup of online accounting options through its QuickBooks Online products.

QuickBooks Online comes in three flavors: Online Simple Start, Online Essentials, and Online Plus, each with their own features, limitations and subscription price point. For more specific information: QuickBooks Online Options.

So what’s the biggest advantage to shifting accounting functions online? Some of the biggest pluses include the ability to work on your books from any internet-connected computer regardless of platform (PC or Mac with any newer browser), no software upgrades to buy, and data availability on mobile devices.

You have to know that not all options available in the desktop version of QuickBooks are available in the online version. But hey, there’s always a trade-off when it comes to convenience. Some of the trade-off biggies include limited inventory functionality, the ability to record only basic customer and vendor data, minimal integration, and no point of sale.

So, all that said, who would find QuickBooks Online useful? Primarily service-based small businesses with few or no employees are the best candidates. Being able to access your data from home, the office and road via mobile device doesn’t hurt either.

www.MsQuickBooks.com, www.BookkeeperGirls.com, and www.santarosabookkeepers.com in Santa Rosa prefer to use QuickBooks Online for small businesses that have less than 50 employees. It is an ideal virtual Bookkeeping tool and an outsource accounting tool that can not be duplicated.

Organizing Financial Records

Keeping good financial records is a common nightmare for most small business. What should you keep? How long? Is electronic OK? How to organize all these documents? Here are some high level guidelines, but bear in mind that the law around bookkeeping records is loaded with exceptions and corner cases. In case of doubt, always check with your CPA or attorney. Another disclaimer: this blog is about financial records as they are relevant to the IRS. Records that are HR related or that involve legal contracts follow very different rules.

1. The IRS is OK with electronic records.

The days when the IRS wanted every bookkeeping record to be on paper are long gone. As long as you can retrieve documents easily and as long as they are very clearly readable, IRS inspectors are fine with electronic records.

2. Electronic records are safer than paper.

The beauty of electronic records, besides their obvious advantage in term of space savings is that you can keep backups in multiple locations. With paper, you are at the mercy of a flood, fire or theft. With electronic bookkeeping records, make sure to have backups offsite. Options include online backup services such as Mozy, online document management solutions such as SmartVault or simply DVD copies kept in a safe deposit box at your bank.

3. Don’t rely on 3rd parties to keep records for you.

Many of your financial records are peppered around with 3rd parties such as your bank, your payroll provider, your CPA, your bookkeeper, your insurance company, etc… By the time you get audited, you may no longer be using these providers and you may not have access to this bookkeeping data anymore. Always store copies on your side. For instance, save a PDF of all your bank statements.

4. Keep everything!

The IRS says that you don’t need to keep receipts under $75. However, it also says that you need to be able to substantiate ANY expense that you incur, implying that, if you don’t keep the receipts, you need to keep a log that includes the date, time, place, amount, who was involved, and the business purpose of the expense. Why sweat it then? Just keep all your receipts and handwrite on them the business purpose. You can then file them or scan and shred.

5. Keep the organization simple.

For small businesses, there is no need to create complex indexing systems. For instance, keeping bookkeeping records in separate folders for each vendor might be overkill. A folder per month for all your receipts and statements is often sufficient. You can then rely on QuickBooks to tell you when a given transaction took place, to help you find the correct folder. This is a case of quantity over quality. Focus on keeping everything rather than on the way it is organized. The more complex your organization system is, the less likely you are to stick with it.

6. Keep records for at least 7 years.

The regulations on how long to keep financial records varies wildly depending on the type of record. If you are current with your taxes and filing, 7 years is a safe rule of thumb. Some people might say that it’s too long, but it is simpler to follow this rule than to have to keep different types of records in different folders and once a year go through the excruciating process of having to decide what to get rid of and what to keep. The main exception is for tax returns. Try to keep those for the life of the company. Digitize them if necessary to save space.

7. QuickBooks is your ultimate database.

Where does the IRS inspector go first when they audit you? The general ledger. The inspector will start asking for supporting documentation based on what he/she sees in QuickBooks. The cleaner QuickBooks is and the more details you have about each transaction in QuickBooks, the less documentation you will have to retrieve.

8. Beware of Meals and Entertainment.

It’s the small stuff that gets you in trouble. Write down who you met with and why on each receipt.

9. Archive your calendar.

The IRS will compare the entries in your calendar to the transactions you made. Each year, archive a paper or electronic copy of last year’s calendar in your files.

10. Keep a mileage log in all your car.

The IRS wants you to track the mileage of your odometre at the beginning of your trip and at the end of your trip. An entry like “2/25/11 – 32 miles to go meet with Bob” is not sufficient. It should look more like this: “2/25/11. 45,000 miles through 45,032 miles. Met with Bob Smith from Acme Ventures at 205 1st Street, Austin. Sales call.” Once a month, rip the pages of your log, enter the mileage into QuickBooks and archive the log.