Newsletter

Help for Business Owners

Established as "the Official Link to the U.S. Government," Business.GOV at www.business.gov is a unique website for business owners.  Operated by the Small Business Administration, this website offers business owners information on how to find loans and grants, start a home-based business, register a business name, search or register a corporation, obtain a business license, get information on employment laws, and bid on government contracts.

Within the loans and grants area, for example, business owners can search for loans, grants, and financing using a checklist starting with the business type. The user may then select the type of financing needed, e.g., working capital.  He or she is then given a list of several loan programs to review and pursue to obtain a working capital loan.  This website provides an avenue for business owners to locate financing or other assistance to help survive the current economic situation.

American Opportunity Credit

For tax years beginning in 2009 and 2010, the Stimulus Act includes taxpayer-friendly modifications to the Hope Scholarship higher education tax credit (Hope Credit).  The Hope Credit is also temporarily renamed the American Opportunity Credit (Opportunity Credit).  Under the revamped rules, the Opportunity Credit equals 100% of the first $2,000 of qualified post-secondary education expenses paid during the year plus 25% of the next $2,000. So the maximum annual credit is now $2,500.  Under prior law, the maximum Hope Credit for 2009 was only $1,800, and it probably would be about the same for 2010.

The Opportunity Credit covers the cost of tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education in a degree or certificate program.  It is unavailable if the student has already completed four years worth of academic hours as of the beginning of that year. Under prior law, the Hope Credit was only allowed for the first two years of post-secondary study, and the cost of course materials did not count as a qualified expense.

The Opportunity Credit is only allowed for a year when the student carries at least half of a full-time load for at least one academic period beginning in that year (same as under the prior-law Hope Credit rules).  Also, as under the prior law, married individuals who file separately are ineligible.

The Opportunity Credit is subject to phase-out rules, but they are considerably more lenient than the prior-law Hope Credit rules.  The Opportunity Credit phase-out range for unmarried individuals is between modified adjusted gross income (MAGI) of $80,000 and $90,000.  The phase-out range for married joint filers is between MAGI of $160,000 and $180,000.  These ranges will also apply for 2010 without any inflation adjustments. Under the prior-law Hope Credit rules, the phase-out ranges for 2009 would have been $50,000 - $60,000 and $100,000 - $120,000, and the ranges for 2010 would probably remain the same.  For this purpose, MAGI is defined as regular adjusted gross income (AGI) increased by income from outside the U.S. that was excluded from taxable income.

The Opportunity Credit is allowed to offset the taxpayer's entire federal income tax liability, including any AMT.  In addition, up to 40% of the Opportunity Credit can be refundable, meaning you can receive a refund even if you did not have taxes withheld or make any estimated payments.  However, the refundability privilege is not allowed to taxpayers who fall under the dreaded Kiddie Tax rules (which can potentially hit students who are up to 23 years old as of year-end). Finally, special refundability limitations apply to residents of U.S. possessions (including the Commonwealths of Puerto Rico and the Northern Mariana Islands).

The new law doesn't make any changes in the Lifetime Learning higher education tax credit (Lifetime Credit) rules.  As you may know, the Lifetime Credit can be as much as $2,000 (based on 20% of up to $10,000 of qualified tuition and fees). As before, the Lifetime Credit can help offset graduate school tuition costs and tuition for non-degreed education such as professional education and certification courses.

Note that for 2009, the Lifetime Credit is phased out between MAGI of $50,000 and $60,000 for unmarried taxpayers and between MAGI of $100,000 and $120,000 for married joint-filing couples.  Obviously, the phase-out ranges for the Opportunity Credit are considerably higher.

Retaining and storing your income tax information and records is an important final step of your tax filing responsibility. This article contains information on the rules for keeping your tax records.

 

Retaining Tax Information and Records

Retaining and storing your income tax information and records is an important final step of your tax filing responsibility.  This article contains information on the rules for keeping your tax records.

When determining how long to keep most of your income tax information and records, look at (a) the time frame over which the IRS can audit a return and assess a tax deficiency or (b) the time frame during which you can file an amended return. For most taxpayers, this period is three years from the original due date of the return, or the date the return is filed, if later. For example, if you filed your 2008 Form 1040 on or before April 15, 2009, the IRS has until April 15, 2012, to audit the return and assess a deficiency. However, if a return includes a substantial understatement of income, which is defined as omitting income exceeding 25% of the gross amount reported on the return, the statute of limitations period is extended to six years.

A good rule of thumb for keeping tax records is to add a year to the IRS statute of limitations period.  Using this approach, you should keep your income tax records for a minimum of four years, but it may be more prudent to retain them for seven years, which is what the IRS informally recommends.  State tax rules must also be considered, but holding records long enough for IRS purposes will normally suffice for state tax purposes, assuming the federal and state returns were filed at the same time.

Certain tax records, however, should be kept much longer than described above and some, indefinitely.  Records substantiating the cost basis of property that could eventually be sold, such as investment property and business fixed assets, should be retained based on the record retention period for the year in which the property is sold.  Tax returns, IRS and state audit reports, business ledgers, and financial statements are examples of the types of records you normally should retain indefinitely.

Keep in mind that there may be nontax reasons to keep certain tax records beyond the time needed for tax purposes.  This might include documents such as insurance policies, leases, real estate closing statements, employment records, and other legal documents.  Your attorney can provide additional guidance.

We hope this brief overview helps you under-stand the income tax record retention rules. If you have any questions regarding your specific situation or if you would like to discuss these rules in more detail, please give us a call.