How long should a taxpayer keep records?

Steve Perry

Published on: 27/06/2025

- The IRS typically audits tax returns within three years of filing, but this extends to six years if over 25% of income is unreported and is unlimited in fraud cases. - Certain transactions like real estate sales or business asset depreciation may require keeping records beyond the standard period. - For example, a homeowner who takes a home office deduction must keep all related purchase, improvement, and sale documents until three years after filing the return that reports the home sale profit. - It is advisable to retain such records for at least seven years to ensure safety. - Keeping detailed receipts and documentation of property acquisition, maintenance, improvements, and sale is crucial to protect tax deductions. - Proper record-keeping prevents costly losses during audits or reviews by tax authorities. - For personalized advice on record retention, contacting a tax professional is recommended.

Bookkeeping

Why Every S-Corporation Owner Needs a Reasonable Compensation Basis

Steve Perry

Published on: 27/06/2025

S-corporation owners are required to pay themselves a reasonable salary for the work they perform. The IRS scrutinizes these salaries, and failure to properly document reasonable compensation can trigger audits and penalties. Many business owners struggle to determine what is considered reasonable. Steve Perry, EA at Books Taxes & More creates comprehensive, audit-proof reasonable compensation studies based on industry data, government statistics, and detailed job analysis. His studies have never lost in an IRS audit. Proactively establishing a defensible salary structure protects business owners from unnecessary payroll taxes and costly audit adjustments. Contact Steve Perry, EA to secure your defense.

Tax education articles and IRS representation advice for individuals and small businesses

Hobby or Business, What’s the Difference and Why Does it Matter?

Steve Perry

Published on: 26/06/2025

- Businesses can deduct most expenses even if they show a loss, unlike hobbies that cannot lose more than their gross income. - The IRS defines a business by its profit motive; hobbies lack this motivation. - Nine subjective factors determine if an activity is a business, including record-keeping, effort to profit, dependence on income, handling losses, adaptability, skills, past profit track record, profitability over time, and potential asset appreciation. - Passing more of these tests strengthens the case for business status, with profitability being the most critical factor. - Misclassifying a business as a hobby risks IRS audits, disallowed deductions, penalties, and interest, potentially for prior years. - Taxpayers should assess their motivation to make a profit and willingness to invest time and effort in the activity. - If profits aren’t growing despite motivation, consulting a qualified small business accountant is essential. - Professional accountants help isolate expenses and evaluate profitability, supporting better business decisions. - The key advice: focus on what you do well and delegate other tasks to experts.

Tax education articles and IRS representation advice for individuals and small businesses

Employee vs Contractor

Steve Perry

Published on: 25/06/2025

- Many small business owners prefer hiring contractors over employees to avoid payroll management complexities but risk IRS audits. - Misclassifying employees as contractors can lead to costly taxes and penalties due to strict IRS scrutiny. - The IRS offers guidance based on three categories: behavioral control (who directs the work), financial control (who manages job expenses and payment), and the nature of the relationship (permanency and benefits). - No single factor determines status; the overall situation dictates if a worker is an employee or a contractor. - Example: A helper working irregular hours with multiple clients and no benefits may be a contractor, but stricter controls over hours and exclusivity would make them an employee. - Minor changes in control or relationship can shift a contractor to employee status, requiring payroll setup. - Business owners should consult tax professionals to properly classify workers and avoid penalties, ensuring compliance and sustainable growth.

Tax education articles and IRS representation advice for individuals and small businesses