Do You Know…
Why coins have "ridges"? The ridges, or milled edges as they are officially called, were added to prevent the shaving of coins. When coins were made of gold and silver, people would often shave the edges of coins before spending them. Eventually, they would have enough shavings to use as money. Today, silver and gold are no longer found in coins, but the milled edge style is still used.
Everyone in business must keep records; this can be a challenge for smaller or home-based businesses, where the owner or primary person in charge must wear several hats at once, thus leaving little time for record keeping. But keeping good records will help you with many activities, including monitoring the progress of your business, and preparing your financial statements and tax returns.
What good records can help you do
Monitor your business.Monitoring your business through good records can show you whether your business is improving, which items are selling, and what changes you need to make.
Prepare financial statements.Good records are required to prepare accurate financial statements. These include profit and loss statements and balance sheets. These statements, in turn, can help you in your dealings with your bank or creditors, e.g., obtaining a line of credit or loan, to help increase your business.
Identify source of receipts.A business receives money or property from many sources. Your records will help you identify the source of your receipts, so you can separate business from non-business receipts and taxable from nontaxable income.
Record deductible expenses.Keep track of deductible expenses throughout the year as they occur. If you don’t, you may forget expenses when you prepare your tax return.
Prepare your tax return.Good records are essential to preparing your business’ tax return. These records are needed to support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statements. In addition, you must keep these records in case the IRS examines any of your tax returns and asks you to explain any items reported.
Kinds of records to keep
Generally, the law does not require any special kind of records, but you should choose a record-keeping system suited to your business that clearly shows your income. In addition, the business you are in affects the type of records you need to keep for federal tax purposes. You should set up your record-keeping system using an accounting method that clearly shows your income for your tax year. Your record-keeping system should include a summary of your business transactions; the summary is usually made in your books, such as a journal and ledger. Your books must show your gross income, deductions, and credits. For most small businesses, the business checkbook is the main source for entries in the business books, but supporting documents must also be kept.
Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents support the day-to-day entries in your books and on your tax returns.
Gross receipts.Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include cash register tapes, bank deposit slips, receipt books, invoices, and credit card charge slips.
Purchases.Purchases are the items you buy and resell to customers. For a manufacturer or a producer, this includes the cost of all raw materials used to manufacture the finished product. Supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include canceled checks, cash register tape receipts, credit card sales slips, and invoices. These documents also will help you to determine the value of your inventory at the end of the year.
Expenses.Expenses are the costs you incur—other than purchases—to carry on your business. Supporting documents should demonstrate the amount paid and that the amount was a business expense. Examples include canceled checks, account statements, invoices, credit card sales slips, and petty cash slips for small cash payments.
Assets.Assets are the property that you own and use in your business. Records are needed to verify certain information about your business assets and to figure the annual depreciation. Your records should show the following information:
• When and how you acquired and disposed of the asset.
• Purchase price.
• Cost of any improvements.
• Section 179 deduction taken.
• Deductions taken for depreciation.
• Deductions taken for casualty losses, such as losses resulting from a fire.
• How you used the asset.
• Selling price.
• Expense of sale.
Types of documents that may provide this information include purchase and sale invoices, real estate closing statements, and canceled checks. If you don’t have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. These can also include statements created for the financial institution by a third party, such as a statement showing an electronic funds transfer.
Your business checking account
Your business checkbook is perhaps the single most important record that you keep for your business. It should reflect the receipts of income and expenses you pay. You should deposit all daily receipts in your business checking account, and the deposit slip should note the source of the deposit. Make sure to keep copies of all slips. Try to make all payments for your business by check. This is a good way to document business expenses. Avoid writing checks payable to cash; if you must do so to pay a business expense, you should include the receipt for the cash payment in your records. If you can’t get a receipt for the cash payment, make a note in your records explaining the payment at the time the payment is made.
These are some of the record-keeping basics you need to keep your business records in good shape. However, each business is different and may have particular bookkeeping requirements. If you have any questions, please contact us.
Finding Social Security and Medicare Info on the Web
Want to get basic information about your Social Security benefits and Medicare? Try going to the Social Security Administration’s (SSA) and Medicare’s Web sites. At the SSA Web site, www.ssa.gov, you can find forms and publications. If you are planning for retirement, you can get a projection of future Social Security benefits by filing Form 704, Personal Statement Request, with the SSA. The form can be downloaded from the Web site. You can also obtain a copy by calling 1-800-SSA-1213.
Anyone needing Medicare information can go to www.medicare.gov. The site has a Medigap Compare section that contains information on Medigap insurance policies, including rating methods and tips on shopping for Medigap plans. The Guide to Health Insurance for People with Medicare is also available.
Medical and dental expenses can be itemized as deductions on Schedule A if they are uninsured expenses that are more than 7.5% of your adjusted gross income. These can be expenses you paid for yourself, your spouse, and your dependents. Whether you’re tallying up expenses to see whether you qualify for the deduction in 1999, or want to know what you need to keep track of in 2000, below is a checklist of items that can and cannot be deducted.
Expenses you can include
• Medical and hospital insurance premiums.
• Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners).
• Meals and lodging provided by a hospital during medical treatment.
• Qualified long-term care.
• Hospital services fees (lab work, therapy, nursing services, surgery, etc.).
• Cost of lead-based paint removal.
• Expenses of an organ donor.
• Cost and care of guide dogs or other animals aiding the blind, deaf, and disabled.
• Capital expenses for equipment or improvements to your home needed for medical care.
• Oxygen equipment and oxygen.
• The part of a life-care fee paid to a retirement home designated for medical care.
• Prescription medicines and insulin.
• Psychiatric care at a specially equipped medical center (including meals and lodging).
• Social Security tax, Medicare tax, FUTA, and state employment tax for a worker providing medical care.
• Special items (artificial limbs, false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchairs, etc.).
• Special school or home for mentally or physically disabled persons.
• Stop-smoking programs.
• Transportation for needed medical care.
• Treatment at a drug or alcohol center (includes meals and lodging).
• Wages for nursing services.
Expenses you cannot include
• Diaper service.
• Expenses for your general health, even if done to follow a doctor’s advice, such as: health club dues, household help, swimming lessons, or a weight loss program.
• Funeral, burial, or cremation expenses.
• Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc.
• Maternity clothes.
• Medical insurance included in a car insurance policy covering all persons injured in or by your car.
• Medicine you buy without a prescription.
• Nursing care for a healthy baby.
• Surgery for purely cosmetic reasons.
• Toothpaste, toiletries, cosmetics, etc.
Timing of the expenses and the deduction
You can deduct in a certain tax year only the medical and dental expenses you paid during that year, regardless of when the services were provided. If you pay medical expenses by check, the day you mail or deliver the check is the date of payment. For example, if you had dental work done in December 1998 but mailed a check to the dentist in January 1999, that expense is eligible as a deduction in 1999. If you use a pay-by-phone or online account to pay your medical expenses, the date reported on the financial institution’s statement showing when payment was made is the payment date. You can include medical expenses you charge to your credit card in the year the charge is made. It does not matter when you actually paid the amount charged the same year.
Few things are more frustrating than an inadequate voice-mail message. We have all received them; messages that were left in a rush, or with no return telephone number, or an unclear pronunciation of a name. You can help yourself and others by taking the time to collect your thoughts before you leave a message, and doing the following:
• Speak clearly and more slowly than you normally would. This is particularly important when leaving your name or phone number.
• If you would like a return call, leave your phone number at the beginning and end of the message, so the person you call can check to see whether he or she wrote it down correctly, without having to replay the whole message.
• Let the person know when is the best time to return the call.
• If a return call isn’t necessary or expected, state so.
• Don’t leave messages that are longer than a minute. You will rush, and will likely end up having to speak directly with the person anyway.
If you want to receive better voice-mail messages, consider the following:
• In your voice-mail message, make sure you clearly and slowly state your name, position in your company, and/or what products or services you are responsible for.
• In your message, request that when leaving a phone number to please leave an area code and/or the best time to return the call.
• Let the caller know when to expect a return call. For example, "I will return your call within 24 hours."
Currently, only those who itemize their deductions may deduct charitable contributions on their federal tax returns. However, 70% of taxpayers don’t itemize and instead take the standard deduction. To promote fairness and increase charitable giving, legislation is being promoted to allow taxpayers who don’t itemize to deduct some charitable contributions. For example, for years 2001 to 2005, a couple who files jointly would be able to deduct 50% of charitable gifts over $2,000; for single filers, the threshold would be $1,000. After 2005, the thresholds would drop for married couples and singles to $1,000 and $500, respectively.
* * *
Increasing deductible amount of appreciated gifts to charities
Another proposal is meant to encourage donors to give gifts of appreciated stock, art, real estate and other assets to charitable organizations. Currently, taxpayers making these types of gifts can deduct only up to 30% of their adjusted gross income (AGI). If the gift is made to a private foundation, the limit is 20%. Proposed legislation would increase these AGI limits to 50% and 30%, respectively.
* * *
Elimination of estate and gift taxes
In late 1999, a Congressional bill containing a provision to phase out and eliminate all estate, gift, and generation-skipping taxes was vetoed. But this bill or a similar measure is likely to come up again in 2000, and will likely be a topic in the presidential race. Because it is still possible that this significant tax law change will be made, it is important to reevaluate any substantial lifetime gift arrangements you may have planned.
Employees who work for tips. If you received $20 or more in tips during March, report them to your employer. Use Form 4070.
Individuals.File an income tax return for 1999, and pay any tax due. If you want an automatic 4-month extension of time to file the return, file Form 4868.
If you are not paying your 2000 income tax through withholding (or will not pay enough tax during the year that way), pay the first installment of your 2000 estimated tax. Use Form 1040-ES.
Household employers.If you paid cash wages of $1,100 or more in 1999 to a household employee, file Schedule H of Form 1040 with your income tax return and report any employment taxes. Report any federal unemployment tax (FUTA) on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 1998 or 1999 to household employees. Also report any income tax you withheld for your household employees.
Partnerships.File a 1999 calendar-year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic three-month extension of time to file the return and provide Schedule K-1, file Form 8736. Form 1065 must then be filed by July 17.
Corporations.Deposit the first installment of estimated income tax for 2000.
Employers.For Social Security, Medicare, withheld income tax, and non-payroll withholding, deposit the tax for payments in March if the monthly rule applies.
Employers.For Social Security, Medicare, and withheld income tax, file Form 941 for the first quarter of 2000. Deposit any undeposited tax . (If the total is less than $1,000 and not a shortfall, you can pay it with the return.) If you deposited the tax for the quarter in full and on time, you have until May 10 to file the return. For federal unemployment tax, deposit the tax owed through March if more than $100.
Employees who work for tips. If you received $20 or more in tips during April, report them to your employer. Use Form 4070.
Employers.File Form 941 for the first quarter of 2000. This due date applies only if you deposited the tax for the quarter in full and on time.
Employers.For Social Security, Medicare, withheld income tax, and non-payroll withholding, deposit the tax for payments in April if the monthly rule applies.