Preparing for Uncle Sam
From which financial records to keep to charitable donations, the following tips will aid your 1999 tax preparation

-- KENTUCKY SOCIETY OF CPAs

Planning for tax season is always an arduous task. The Lane Report’s 1999 Tax Guide is chock full of valuable information provided by the Louisville-based Kentucky Society of CPAs. The following tips should help ease the pain of tax preparation.

Your financial records: what to keep and what to toss

Your file cabinet is overstuffed...your desk is cluttered with old bills...and you spent the last hour searching for your HMO Plan Description -- sure signs that you need a recordkeeping makeover. The Kentucky Society of CPAs offers the following checklist to help you determine what you should keep and what you can safely toss away.

Your will: Keep copies of your will, living will and durable power of attorney where they are safe and easily accessible. Before you file originals in your safe deposit box, check to see if the state you live in seals the box upon its owner's death. If it does, it's best that you leave the originals with your attorney.

Tax returns: Tax returns and supporting data should be kept for at least seven years after your original return is filed. The IRS generally has three years to challenge your tax return; that can be extended to six years if the IRS has reason to believe that you substantially underreported your income by omitting from gross income an amount greater than 25 percent of the gross income stated on your return. There is no time limit on when the IRS can institute an audit if the return is fraudulent or if no return is filed for the year. Even though it may be safe to throw out the supporting data after seven years, CPAs recommended that you hang onto the returns themselves since they provide an excellent financial history.

Life insurance policies: Keep insurance policies in a fireproof home safe or in your safe deposit box. Be sure to include information on any other life insurance you may have, such as policies with your employer, mortgage-life or credit-life insurance, and any death benefits due you as a veteran of the armed services.

Your investments: For tax purposes, you need to hang onto buy-sell trade confirmations to show when each security was bought and sold, the price you paid and commission charged. If you are reinvesting dividends, you should keep your dividend reinvestment statements as well. Seven years after you file your return showing a gain or loss from selling the securities, you can safely discard your confirmations and dividend reinvestment statements.

As for your monthly or quarterly brokerage statements, there's really no need to keep them if your annual year-end statement summarizes all transactions made during the year.

Bank and credit card accounts: Keep receipts of your bank deposits and ATM transactions until you receive you bank statement and can verify that the transactions were properly posted to your account. Then feel free to toss them. There's also no need to file away years of canceled checks; save only those needed as support for tax purposes.

Check your credit card statements when they come in to be sure that your charges and payments are posted correctly. Retain them only if you think you might need them to substantiate a tax deduction, verify a purchase, back up a warranty or track spending.

Personal papers: Some records should be retained indefinitely. These include the following: birth and marriage certificates; separation and divorce documents; real estate deeds, titles and property surveys; military records; passports and citizenship or naturalization papers; Social Security cards and family health and immunization records.

Retirement plans: It's a good idea to keep indefinitely (or until your retirement funds are depleted) retirement plan documents from your pension, profit-sharing, 401 (k) and IRAs, along with annual statements showing the status of your plans. Also, be sure to keep records of any nondeductible contributions made to your employer-sponsored retirement savings plan or IRA. You will need this information to avoid paying tax twice on the same money.

Bills and pay stubs: Once you've paid a bill and verified that the check has been cashed, you generally can throw away the bill. You may want to keep bills for jewelry, furniture and other major purchases in case you need to prove their value in the event of loss or damage. Receipts for items under warranty should be kept until the warranty expires.

It's good idea to keep your pay stubs until the end of the year, when you can compare the year-end totals with the amounts shown on the W-2 form you get from your employer. If the information matches, you can discard your pay stubs.

CPAs say that the new year is an ideal time to organize you financial records. Make it a point to keep you financial paperwork under control on a regular basis so you can spare yourself the overwhelming task of sorting through years of financial documents down the road.

Deduction Reasoning

The financial aspects of running a business can be challenging -- maximizing income, minimizing taxes, managing cash flow. That's why small business owners everywhere need to make the most of tax deductions that can help them offset many of the expenses associated with growing a business. The Kentucky Society of CPAs says identifying and planning how to claim these deductions now will give business owners something for which to be thankful well into the tax season when it's time for calculating their tax bills. Here are 10 deductions business owners should not overlook.

Credit card annual fees and finance charges: Although it has been many years since taxpayers could deduct interest on personal credit, fees and interest related to a credit card you use for business are still deductible. Similarly, if you take out a personal loan and use the proceeds for your business, the interest you pay is deductible. You must, however, show that the money actually was used for business.

Expensing deduction: For 1998, you may elect to expense the cost of up to $18,500 of qualified property such as equipment or machinery you place in service in your business. This means you can write off the entire cost of qualifying business property in the first year rather than depreciating it over a period of years. The expensing deduction is reduced dollar-for-dollar to the extent the total cost of qualified property placed in service exceeds $200,000 during the tax year.

Industry specific expenses: The Internal Revenue Code allows businesses to deduct all ordinary and necessary expenses of operating the business. What's ordinary and necessary varies from one industry to another. For example, while most people are allowed to deduct the cost of professional publications, a person who works in public relations may be able to deduct the cost of almost any newspaper or magazine because an awareness of the media is critical to the public relations field.

Educational expenses: Business owners may deduct the cost of any seminars, courses or educational programs they take as long as the programs are ordinary and necessary expenses of the business.

Bad debts: As a business owner, you might not expect to see the words thankful and bad debt in the same sentence. But if you're unable to collect money someone owes your business, you might very well be thankful to learn Uncle Sam allows you to deduct the amount of your bad debt -- just so long as you take the deduction in the year it becomes partly or totally worthless. Bear in mind that it's important to keep detailed records to show that you have taken reasonable steps to try to collect the debt. A bad debt deduction by a cash-basis taxpayer can be taken only if an actual cash loss has been sustained or if the amount deducted was included in income.

Auto expense: Owning and maintaining a car can be expensive. That explains why small business owners appreciate the opportunity to deduct some of the costs associated with using a car for business. Tax law allows you to deduct the actual costs such as gas, oil, insurance, repairs, maintenance and depreciation, or you can simply deduct 32.5 cents per mile, the IRS standard mileage rate for 1998. In either case, be sure you have the records to substantiate your deduction or begin pulling them together now.

Business entertaining: If you entertain customers or clients, you can deduct 50 percent of the cost if the expense is directly related to the business and business is discussed, or "associated" with the business and the entertainment takes place immediately before or after a business discussion. The IRS no longer requires you to keep receipts in order to deduct business-related entertainment (and lodging) expenses under $75, but you still must maintain records so you can substantiate the deduction in the event of an audit.

Obsolete inventory: Goods that cannot be sold at normal prices or in the usual way because of damage or changes of style may be valued for deduction purposes at bona fide selling prices, less direct costs of disposition. Take the time now to determine if you have any products or other goods that fall into this category.

Charitable donations: Here's an added incentive to start cleaning the storage rooms. Corporations can generally deduct donations, including inventory, up to a maximum of 10 percent of the company's taxable income. This 10 percent overall contribution rule applies to S corporations as well. Individuals, including sole proprietors and partners, are allowed higher contribution limits up to 50 percent (with regard to cash contributions) of taxable income. Be careful when donating inventory, however, because special rules apply.

Retirement plans: Contributions to IRS-qualified retirement plans are tax deductible, providing you with a current benefit while helping to ensure a financially secure future. What's more, as a business owner, you can take current tax deductions for contributions to qualified retirement plans for your employees.

There may be additional tax deductions your business is eligible to claim. To be sure you haven't overlooked any, spend time to consult with a CPA.

Charitable donations: fact and fiction

A couple who contributed several hundred dollars to help neighbors provide medical care for their disabled child was surprised to learn that they could not claim a charitable deduction on their tax return for their contributions. If stories like this one have you wondering what's fact and what's fiction when it comes to deducting charitable donations, the Kentucky Society of CPAs offers the following advice to help you make the most of your charitable contributions.

Donations made to Disabled or Homeless Individuals: Fiction. No matter how needy the recipient or how good your intentions, contributions to individuals are not deductible. In order to claim a deduction, you must make your donation to a qualified organization. As a rule of thumb, a qualified organization is a nonprofit charitable, religious or educational group that meets government guidelines. Internal Revenue Service (IRS) Publication 78, which is periodically updated, provides a list of qualified organizations.

Donations of used clothing to charity: Fact. You may deduct the fair market value of used clothing you contribute to charity. The IRS says that the fair market value of used clothing is the amount one would pay for these items at a thrift shop or second-hand clothes store. The same rule applies to donations of furniture and other household items. However, you must have a statement from the organization acknowledging the gift and describing the property.

Your canceled check is sufficient proof of any donation: Fiction. Your canceled check is sufficient proof only if the donation is under $250. However, if you make a single donation of $250 or more to a charity, you need a contemporaneous written acknowledgment from the organization. Note that this rule applies only to a single donation. There is generally no need for you to get written conformations if you make five separate $100 donations to the same charity, even though the aggregate amount exceeds $250. However, anti-abuse rules apply. You have until the filing due date of your return to obtain the written acknowledgment.

Services you perform on behalf of charities: Fiction. The value of your services is not deductible, but your volunteer efforts do entitle you to deduct the cost of unreimbursed out-of-pocket expenses, such as the cost of stationery, postage and telephone calls you incur on behalf of the charitable organization. Under limited circumstances, allowable deductions also include travel expenses and a reasonable amount for lodging and meals. Just be sure to keep detailed records of your expenses.

There is no limit for deductible charitable contributions: Fiction. Be as generous as you like, but keep in mind that there are deduction ceilings for very substantial donations. The amount you can deduct depends on whether you donate cash or property and the type of charity to which you donate. For cash contributions, the deduction ceiling is generally 50 percent of your adjusted gross income, but, in some cases, a 30-percent limit applies. For appreciated property donations, the deduction limit is generally 30 percent of adjusted gross income. In any case, it's a good idea to consult with a CPA or other tax professional when making large charitable contributions.

Contributions of appreciated property provide additional tax benefits: Fact. The easiest way to contribute to as charity may be to write a check, but if you plan to make a sizable donation, you can save more in taxes by contributing property that has appreciated in value and qualifies as long-term capital gains property. That's because in addition to the deduction you earn for the contribution, you avoid paying the capital gains tax that would be due if you sold the investment yourself. It makes no difference to the charity as a tax-exempt entity, it will not incur the capital gains tax when it sells your gift.

If you receive a gift in return for a donation, your deduction is limited: Fact. If you contribute $500 to attend a fundraising dinner for your church or synagogue, and the fair market value of the dinner is $100, your deduction is limited to $400- the difference between your donation and what you received in exchange. In such instances, the charity must tell you how much of your donation is deductible.

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