Knowing that the thought of taxes may already be a distant memory for many of you--and for some still the nagging realization that October 15th is looming ever so near--we thought this might be a good time share some office clean up info. The article below appeared in the San Diego Union and I thought it was a really good summary.
By Claudia Buck
MCT NEWS SERVICE
August 31, 2008
Feeling buried beneath piles of paper? Are your grocery receipts and 401(k) statements stuffed in a desk drawer or spilling out of your in-basket? Take heart. You've got lots of fellow paper pack rats, particularly with the tax season behind us.
What to keep and what to toss?
“We get these questions all year, but especially after tax time,” said Diana Muller, an enrolled agent and partner with Sacramento-based Just Taxes. “This stuff piles up.” To clean up your home office or kitchen table, here's a guide to financial record-keeping and discarding.
To get started, gather a pile of file folders, marked by subject (“Retirement account,” “Taxes,” “Vehicles,” etc.). Invest in a file cabinet or secure box. For documents you want to keep, consider getting a small safe or safety deposit box. As backup, keep copies of important documents in your computer.
Taxes: Generally, keep your final tax return forever. But all the tax-related documents that go with it need to be kept for only three to four years (how long you're subject to a possible audit). If you think you may have understated your income, keep documents up to seven years.
Canceled checks: Whether you bank online or in person, you can discard after one year. However, keep copies that might be needed for taxes, warranties or other insurance reasons.
Investments, 401(k)s: Keep all documentation of a purchase or sale of any stock, bond or mutual fund. Either make a separate file or lump them all together. Once it's sold, keep records for seven years. For IRA and other retirement accounts, keep monthly statements until your end-of-year summary arrives.
Vehicles: Keep all maintenance records and paperwork related to your car, until it's sold. Then give the file to the new owner.
ATM, credit card receipts: Keep until you can check them against your monthly statement; toss if they reconcile. Keep receipts for insurance claims or tax deductions. And if it's for a consumer product, attach it to the warranty for future proof of purchase.
Home-related documents and receipts: Keep records of all home improvements until you sell the house because they can be deducted against capital gains at tax time. Phone and utility bills can be tossed after a year, unless you're deducting a portion for business expenses.
Documents to keep forever: Birth and marriage certificates, current passports, home inventory (for insurance records), Social Security cards, “pink slips” for vehicles, stock-purchase agreements, tax returns, current insurance policies and divorce papers.
Don't toss it, shred it: When in doubt, shred any paperwork that contains personal financial data, especially Social Security numbers, PINs or passwords, bank documents, signed contracts or leases, even travel itineraries or used airline tickets.
If you would like to research this topic further there is some good information available from the IRS in Publication 583 entitled Starting a Business and Keeping Records. It provides a sample of a record keeping system for your business along with sample reports.
Once you get a system in place all your record keeping will be much easier as you will know what to do with each piece of paper when it hits your desk.
Sunday, August 31, 2008
Saturday, August 30, 2008
Tax Computation Related to the Loss of an Animal
Since originally posting this entry on July 24th I've done some further research as well as having shared a conversation with Joanne Brush (Brush Walker Alpacas in Geneseo, IL). Unfortunately, George and Joanne had to go through this process last year when they lost King Arthur--an incredibly handsome Hemingway son.
As it turns out what I had originally shared stating that the replacement animal needed to be the same sex as the animal it is replacing is not the case. You can replace the animal with either sex. It only states it must be the same species. You can't replace an alpaca with a dairy cow; but you can replace a herdsire with a female. Treasury Regulations Sec. 1.1033(a)-2 states the replacement property must be similar or related in service or use. It does not state they must be the same sex. The provisions of this section are not as strict as the like-kind exchange rules found under IRC Section 1031. The reason for the leniency is one (like-kind exchange) is planned and the loss of your animal is not.
Additionally, IRC Section 1033(a)(2)(A)(i) states property you own (alpacas in our case) can be the replacement property for the lost animal if they are owned by you on the date of death of the animal you are replacing. For example, in addressing the loss of our female, Athena. We can look at the tax basis of any of the alpacas we owned as of July 16th and apply any gain to the basis of as many animals as we need to absorb the gain. The gain will ultimately be realized upon the sale of each of the alpacas we used as replacement property.
The details of the replacement must be included in your tax return within two tax years of the death of the animal. If no replacement is made then an amended return for that year is required.
Hope this clarification helps when you have to face this difficult time.
As posted on July 24th:
Filling out insurance papers and reviewing necropsy results with our vet just got me thinking that what happened last week will happen to all of us sooner or later--we all hope for later--we lost our first adult alpaca on the farm on Wednesday, July 16th. We have lost crias before--and that is not any less painful--but I haven't had four years of experience with that wonderful little creature as I did with Athena. We have lost adult alpacas in the past but they have always been at one of our clients' farms--like Wilson or King Arthur. Shocking and very upsetting when you hear about it--but not right in front of you. Athena was not the most gorgeous girl on the block--some might think down right ugly by some standards--but she was a great mom and the Studmasters she was bred to helped to create some beautiful crias.
You can postpone reporting the gain if you spend the reimbursement to replace the animal. To postpone reporting all the gain, the cost of the replacement property must be at least as much as the reimbursement you receive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. In our example you received insurance proceeds of $20,000, if you replaced the alpaca with a similar animal but only spent $18,000 you would need to report a gain of $2,000. Depending on the timing of the replacement purchase you may have to amend the return for the year of loss.
Please let me know if you have questions on how this actually shows up on your return--and also let me know if I have completely confused you. Bottomlime--It is the one time you feel good about your decision to pay those insurance premiums.
As it turns out what I had originally shared stating that the replacement animal needed to be the same sex as the animal it is replacing is not the case. You can replace the animal with either sex. It only states it must be the same species. You can't replace an alpaca with a dairy cow; but you can replace a herdsire with a female. Treasury Regulations Sec. 1.1033(a)-2 states the replacement property must be similar or related in service or use. It does not state they must be the same sex. The provisions of this section are not as strict as the like-kind exchange rules found under IRC Section 1031. The reason for the leniency is one (like-kind exchange) is planned and the loss of your animal is not.
Additionally, IRC Section 1033(a)(2)(A)(i) states property you own (alpacas in our case) can be the replacement property for the lost animal if they are owned by you on the date of death of the animal you are replacing. For example, in addressing the loss of our female, Athena. We can look at the tax basis of any of the alpacas we owned as of July 16th and apply any gain to the basis of as many animals as we need to absorb the gain. The gain will ultimately be realized upon the sale of each of the alpacas we used as replacement property.
The details of the replacement must be included in your tax return within two tax years of the death of the animal. If no replacement is made then an amended return for that year is required.
Hope this clarification helps when you have to face this difficult time.
As posted on July 24th:
Filling out insurance papers and reviewing necropsy results with our vet just got me thinking that what happened last week will happen to all of us sooner or later--we all hope for later--we lost our first adult alpaca on the farm on Wednesday, July 16th. We have lost crias before--and that is not any less painful--but I haven't had four years of experience with that wonderful little creature as I did with Athena. We have lost adult alpacas in the past but they have always been at one of our clients' farms--like Wilson or King Arthur. Shocking and very upsetting when you hear about it--but not right in front of you. Athena was not the most gorgeous girl on the block--some might think down right ugly by some standards--but she was a great mom and the Studmasters she was bred to helped to create some beautiful crias.Some of our friends and clients have also had some losses this year so I thought it might be a good time to share the tax impact of the loss under a variety of different scenarios.
In our example we will assume the following:
The purchase price: $20,000
Depreciation taken to date: $8,100
Net book value of $11,900 ($20,000 less $8,100)
Net book value of $11,900 ($20,000 less $8,100)
There was no insurance on the animal
The difference between the cost and the depreciation taken to date (net book value) is your taxable loss. The actual accounting entries to remove the asset from your accounting records would be
Debit - Gain/Loss on death of alpaca for $11,900
Debit - Accumulated Depreciation for $8,100 (zeros out the prior activity for this alpaca)
Credit - Breeding Herd (zeros out the original purchase of the alpaca)
If the animal was part of a note payable when the animal passes then you will be covered by insurance (as all contracts require that the animal be insured during the entire term of the loan). The only difference in treatment compared with the entry above reflects the insurance proceeds received. So if the animal was insured for $20,000 your entry would look like this:
Debit - Note Payable (and/or Cash) for $20,000
Credit - Gain/Loss on death of alpaca for $20,000
When you look at the activity in each of the accounts you would see that the asset accounts have been zeroed out and only the Gain/Loss account has a credit balance of $8,100 (net of the debit of $11,900 and the credit of $20,000). This gain is taxable unless you purchase a replacement animal within the two year time allowed. A replacement animal is an animal of the same species and same sex used for the same purpose.
You can postpone reporting the gain if you spend the reimbursement to replace the animal. To postpone reporting all the gain, the cost of the replacement property must be at least as much as the reimbursement you receive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. In our example you received insurance proceeds of $20,000, if you replaced the alpaca with a similar animal but only spent $18,000 you would need to report a gain of $2,000. Depending on the timing of the replacement purchase you may have to amend the return for the year of loss.
Please let me know if you have questions on how this actually shows up on your return--and also let me know if I have completely confused you. Bottomlime--It is the one time you feel good about your decision to pay those insurance premiums.
Sunday, August 24, 2008
Grandparents' Tour
Yesterday we were happy to have the Philadelphians Group Tours join us again with their Grandparents' Tour for the second time. They last visited our farm in August of 2006. It was just as impressive as the last time when the big white tour bus pulled into our barn yard and 33 eager visitors appeared--quite fun.This time was equally enjoyable for all of us. I'm not sure who has more fun--our visitors or us. Their smiles and laughter were infectious. As always, Sun Tzu was ready to act as our official farm ambassador welcoming everyone as they exited the bus.
Also joining us for the day's visit was Peggy Boisvert, a very talented local fiber artist. Peggy brought her spinning wheel to demonstrate the process of spinning the raw fiber into yarn. She also displayed some yarn she had spun from Tucker Creek's Franchesca's fiber.
We would like to thank the Grandparents' Tour for their visit and hope they join us again soon.
Friday, August 22, 2008
2008 CASH SALE
Every one is heading for the 2008 Cash Sale--including the critters.Normally this sale occurs at the end of the year—but this year there are so many wonderful tax benefits we wanted to make sure you had plenty of time to use them and make the most of your tax planning opportunities.
As a reminder the Section 179 deduction was increased to $250,000 (with an $800,000 ceiling) and a Special 50% Bonus Depreciation deduction was added. The 50 Bonus Depreciation deduction requires that the purchases be new--in alpaca terms that would be a maiden either bred or unbred. So far we don’t know if the IRS is going to extend these deductions at this level beyond 2008. So we decided to begin the sale in August. This year you will have the opportunity to buy some wonderful bred females who will deliver this year—another facet not normally realized when we have the sale at the end of the year.
So, let's get to the details. All these are for cash sales (as usual--we will consider payments over three months the same as cash). If cash is not in your budget right now, we have very favorable financing terms we can arrange for you (the pricing will just not be as good as the Cash Sale pricing).
If you buy one alpaca the price is discounted 20% off of the list price.
If you buy two or more alpacas you will pay the 30% off the list price for the entire package.
This is a great opportunity to add some Studmaster genetics to your herd, do some tax planning and save some money all at the same time. If you have any questions email me at peggy@alpacadigest.com or call toll free at 877-915-0522.
Wednesday, August 6, 2008
Charitable Contributions
Did you make a cash contribution to your favorite charity? Have you recently spent a weekend cleaning stuff out of your garage or basement that you then donated to a local charity?
Charitable contributions can be tax deductible, but you must have the proper records to support your deduction. Due to the Pension Protection Act of 2006 the rules on record keeping for charitable contributions became a little more strict beginning in January 2007.
To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.
Under the previous rules, records such as personal bank registers, diaries or notes made around the time of the donation could often be used as evidence of cash donations. Personal records like this are no longer sufficient.
Here are some additional tips to help you deduct your charitable contributions on your 2008 federal tax return.
Charitable contributions are deductible only if you itemize deductions using Form 1040. (If you are a partnership or a sub-chapter S corporation the deductions will appear on your K-1 with instructions for their inclusion on Schedule A of your Form 1040. Only if you are a regular corporation will you reflect a charitable contribution on page one of your federal tax return.)
Contributions must be made to a qualified organization.
Used clothing and household items such as furniture, linens and appliances must be in good used condition.
Vehicle donations are subject to special rules.
To deduct charitable contributions of items valued at $250 or more you must have a written acknowledgment from the qualified organization.
To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Non-cash Charitable Contributions, and attached the form to your return.
So all of this is fine and good; but, how does it apply to alpacas? The rules as found in Publication 526, page 11, state that if the asset contributed is ordinary income or short term gain property you are limited to its fair market value less the amount that would be ordinary income or short term capital gain if you sold the property for its fair market value. Generally this means you are limited to your basis in the asset as your deduction. Example-you have a male you want to donate to 4-H whose value is $1,000. He was born on your farm. The deduction computation would be the FMV of $1,000 less the ordinary income you would generate if you sold him of $1,000 resulting in a deduction of zero. However, if your property donated is considered capital gain property your deduction can be the fair market value which would result in a $1,000 deduction in the above example.
More information is available on the IRS Web site at IRS.gov. A good resource is IRS Publication 526, Charitable Contributions, found on the web site or by calling 800-TAX-FORM (800-829-3676).
Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by Internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is http://www.irs.gov/.
Above article courtesy of the Internal Revenue Service--with a few clarifications interspersed.
Charitable contributions can be tax deductible, but you must have the proper records to support your deduction. Due to the Pension Protection Act of 2006 the rules on record keeping for charitable contributions became a little more strict beginning in January 2007.
To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.
Under the previous rules, records such as personal bank registers, diaries or notes made around the time of the donation could often be used as evidence of cash donations. Personal records like this are no longer sufficient.
Here are some additional tips to help you deduct your charitable contributions on your 2008 federal tax return.
Charitable contributions are deductible only if you itemize deductions using Form 1040. (If you are a partnership or a sub-chapter S corporation the deductions will appear on your K-1 with instructions for their inclusion on Schedule A of your Form 1040. Only if you are a regular corporation will you reflect a charitable contribution on page one of your federal tax return.)
Contributions must be made to a qualified organization.
Used clothing and household items such as furniture, linens and appliances must be in good used condition.
Vehicle donations are subject to special rules.
To deduct charitable contributions of items valued at $250 or more you must have a written acknowledgment from the qualified organization.
To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Non-cash Charitable Contributions, and attached the form to your return.
So all of this is fine and good; but, how does it apply to alpacas? The rules as found in Publication 526, page 11, state that if the asset contributed is ordinary income or short term gain property you are limited to its fair market value less the amount that would be ordinary income or short term capital gain if you sold the property for its fair market value. Generally this means you are limited to your basis in the asset as your deduction. Example-you have a male you want to donate to 4-H whose value is $1,000. He was born on your farm. The deduction computation would be the FMV of $1,000 less the ordinary income you would generate if you sold him of $1,000 resulting in a deduction of zero. However, if your property donated is considered capital gain property your deduction can be the fair market value which would result in a $1,000 deduction in the above example.
More information is available on the IRS Web site at IRS.gov. A good resource is IRS Publication 526, Charitable Contributions, found on the web site or by calling 800-TAX-FORM (800-829-3676).
Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by Internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is http://www.irs.gov/.
Above article courtesy of the Internal Revenue Service--with a few clarifications interspersed.
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