Records Retention

The IRS publishes guidelines on how long to keep accounting records.  These are records such as income, deductions, or credits taken on a tax return.  The IRS defines a period of time ('period of limitations') for holding records as the time for which one can amend a return or the IRS can impose more taxes on the taxpayer.

The time periods for income tax returns include:

• 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for a credit or refund after you file your return.
• 7 years if you file a claim for a loss from a worthless securities or bad debt deduction.
• 6 years if you did not report income you should have reported, and it is more than 25% of the gross income shown on a return.
• Keep records indefinitely if you did not file a return.
• Keep records indefinitely if you filed a fraudulent return.

There are other things to consider based on the nature of the records:

• Property records - keep until year property is disposed. 
• Healthcare insurance - if you claimed the premium tax credit, keep records for as long as you received advanced credit payments through the Health Insurance Marketplace and premiums paid. 
• Business records - if you have employees, employment tax records should be kept for 4 years after the tax becomes due or is paid, whichever is later.

You will find IRS information here and here for clarification.

Quickbooks Payroll

Within the Quickbooks Online or Desktop software is a payroll feature that provides quality payroll processing services.  This feature can be a cost-effective alternative to 3rd party processors.

Quickbooks Payroll allows small business owners to:

• Produce payroll checks at any frequency (weekly, bi-weekly, or monthly)
• Submit direct deposit
• Make payroll tax payments
• File quarterly 941 reports
• File state quarterly reports 
• Accommodate any other payroll tax liability (garnishments, retirement contributions, etc)

Quickbooks payroll will also handle the W2s at year-end.

Quickbooks Online software has the feature as part of the online accounting software.  Once it is turned on, one can begin processing payroll after set-up.  Quickbooks Online also has a stand-alone online version of payroll.  If a business needs payroll, but not the full accounting package, Quickbooks online payroll will accommodate these busiensses.

The payroll tool from Quickbooks is a  hands-on feature.  Business owners are in control of their processing. 

LFC can help businesses with their payroll needs.  Contact the LFC office from the Contact Us feature on this blog or set up an appointment. 

Deductions vs. Credits

In order to understand individual income taxes, it is important to have a clear understanding of deductions and credits.  As one works to take advantage of deductions and credits to reduce one's tax liability, it is important to know how each impacts the amount of tax one will owe.  

Explaining deductions & credits:

Deductions

Deductions can be in the form of adjustments or itemized deductions.  Examples of deductions include:

Schedule 1 Deductions

• IRA Contributions
• SEP IRA Contributions - Small Business Retirement Plans
• Educator Expenses
• Health Savings Account Contributions
• Self-Employed Health Insurance Premiums
• Student Loan Interest Deduction

Schedule 1-A Deductions

• Qualified Tips Received
• Qualified Overtime Received
• Enhanced Deduction for Seniors

Form 8895 Deduction

• Qualified Business Deduction for Small Businesses

Itemized Deductions (used when greater than the standard deduction based on filing status)

• Medical Expenses (in excess of 7.5% of Adjusted Gross Income)
• State and Local Taxes (SALT) - up to $40,400 (2026)
• Mortgage Interest
• Charitable Contributions

All of these categories of tax deductions provide significant savings to taxpayers.  Here is an example of the tax savings from a deductible expense:

Assuming a taxpayer is in the 22% tax bracket (based on one's taxable income). The taxpayer makes a deductible IRA contribution for the year.  His savings would be:

                                       $8000    IRA Deduction

                                            .22    Marginal tax rate

                                      ______

                                       $1760   Tax Savings

Total savings from qualifying deductions depends on an individual taxpayer's marginal tax bracket.

Credits

Credits reduce one's tax liability on a dollar-for-dollar basis.  This means the amount of the credit is the total tax savings experienced by the taxpayer.  It is not contingent of marginal tax rates.

Types of Credits

• Non-refundable
• Refundable

Non-refundable credits do not reduce one's tax liability below $0.  Refundable credits can reduce a taxpayer's liability to $0 and any excess credit remaining can be received by the taxpayer as part of a refund.

Examples of credits include:

• Child and dependent care credit
• Child care credit
• Education credits
• Adoption credit
• Earned income credit

Here is an example of how a credit would impact a taxpayer's tax liability:

                                 Taxes owed before credits       $4000

                                  Education credit                       2500

                                                                                   _____

                                 Total taxes owed                       1500

The credit reduced the taxes owed.

Understanding how deductions and credits work are an important part of tax planning.  Contact LFC for additional information or help with your tax planning and preparation needs.

Are we double taxed?

It is interesting to hear from taxpayers when a tax is imposed, particularly when it is the result of a gain on investment or sale of a business, that this represents double taxation. This concept is the result of thinking that since income earned had already been taxed before (i.e. wages or salary earned that had been subject to income tax and social security tax), that income should not be taxed again.  But this is not what is happening.

Explanations:

When income is earned through salaries or wages, it is taxed when a tax return is filed.  It will be subject to  tax withholding (income taxes and social security taxes), so a taxpayer is using after-tax income to pay for personal expenses or investing.

If after-tax income is used for investments, and these investments experience capital appreciation, the growth on this investment is taxable if it is recognized (the investment is sold).  The growth on the investment is new income (a new event) and it is taxed (at capital gain rates), not the original investment. The same is true with the sale of a business:  the growth of the business is taxed, not the original investment.

The receipt of social security benefits also confuses people.  One should look at social security taxes that are withheld from paychecks similarly to 401(k) contributions.  These funds are taken out of paychecks, along with an employer match, and benefits are received at retirement.  There is no double taxation because the social security benefits are a new event/new income that was funded by the social security taxes taken out of a person's paycheck over their working life.

It should be understood that events cause taxation.  Earning salaries and wages produces income taxation and the sale of assets creates capital gain taxes.  These are different events and have their own tax consequences.

For more clarity on taxes for individuals and businesses, contact LFC through the Contact Us feature on this blog.

Using Rules in Quickbooks Online

Within Quickbooks Online, a feature to connect to one's bank account can be utilized to help with data entry and bank reconciliations.

Once Quickbooks is connected to the business accounts (bank accounts and credit cards), data from the bank is available to users in a queue.  These transactions within the queue need to be coded properly (coded to the chart of accounts) and saved to the account registers.  This data entry feature helps save time because much of the work is done for the accountant.  

Rules can be set up in Quickbooks that allow transactions to be automatically entered from the bank queue directly to the chart of account register.  The rules are criteria of a transaction that is set up in Quickbooks and when the data comes down from the bank, it will recognize the transaction and can automatically enter it into Quickbooks.  Here is an example:

Bank transaction

from bank queue:             Office Depot purchase                            $50.00

Rule:     Office Depot purchases will be coded to Office supplies and enter the transaction automatically.

Result:   All future Office Depot transactions from the bank queue will be coded to Office Supplies, with no effort from the accountant to record the transaction.

Note:   Rules can work for expenses, deposits/cash receipts of sales, and liability payments to help streamline data entry.

Although rules can work well for some data entry situations, it can cause some problems.  From our example above, Office Depot purchases coded automatically to office supplies may not be correct in some circumstances.  Suppose a purchase at Office Depot is for a computer or office furniture.  These items are assets, not expenses.  But the rule established for Office Depot records everything to Office Supplies.  This means accountants need to be diligent in recording transactions despite the use of rules used within their accounting software.  This requires auditing of transactions and recoding to the chart of accounts if necessary. 

Rules can be a very helpful tool when entering data within an accounting system. However, it is a good idea to monitor the rules setup and determine that they are capturing and recording data property to ensure the financial statements are correct.

LFC can help with Quickbooks Online and the establishment of rules for one's accounting system.  Contact LFC using the contact feature from this blog.

Effective vs. Marginal tax rates

It is important for taxpayers to understand taxes and tax rates as they impact an individual taxpayer's financial life.  The type of tax rates explained here are:

• Effective Rate
• Marginal Rate

The effective rate can be explained as the total tax (tax liability minus credits and other tax adjustments) divided by gross income:

                                              Total Tax Liability

                                              Less Credits & Adjustments

                                              _______________________

                                               Gross Income

This number will tell you what % of taxes you paid on your total income after all credits and adjustments have been accounted for.  It will include total tax liability (income tax and other taxes such as self-employment taxes) to arrive at the effective rate.   This number is good to know for it tells taxpayers what % of their income is consumed by income taxes.

Margin tax rates are described as the rate of tax you are assessed upon earning an additional dollar of income.  The current code (2025) has the following tax rates:

10%, 12%, 22%, 24%, 32%, 35%, and 37%

These rates are assessed on taxable income.  This is the total income on the tax return after adjustments and itemized deductions (or standard deduction). 

For an example of how the marginal rates work, let's look at a married filing jointly taxpayer (2025 brackets):

Income range                                 Tax Bracket

0  to  23,850                                           10%

23,851  to  96,950                                  12%

96,951  to  206,700                                22%

206,701  to  394,600                              24%

394,601  to  501,050                              32%

501,051  to  751,600                              35%

751,601  and over                                  37%

Each bracket represents an income range which is taxed at the given rate. At the higher income levels, income is taxed at a higher rate.  The result is income taxed at various rates as one goes up the income scale based on one's taxable income on the income tax return.

Keep in mind, knowing one's marginal tax rate is important not only for its impact on income earned (i.e. next dollar earned would be tax at the marginal tax rate), but this applies to deductable expenses as well:  if one is in the 24% rate bracket, you will save $24 in taxes for each additional $100 deduction.

LFC provides tax services to individuals and small businesses.  Contact the LFC office for assistance via Contact Us on this blog.

Independent Contractors vs. Employees

 Many businesses hire independent contractors to fulfill work they need done rather than hire someone as an employee.  Plus, they may need the workers for a short-term basis, depending on the industry. Businesses may also use independent contractors to obtain a specific skills for which they do not currently have from their staff.  

Whatever the purpose for the use of independent contractors, independent contractors provide businesses with the opportunity to obtain flexible labor and expertise when they need it.

Despite the positive aspects of independent contractor labor, the IRS has some specific guidelines businesses must be aware of when hiring such individuals. Misclassifying someone as independent can become costly for an employer.  Information from the IRS can be obtained here.

In general, the key indicator as to whether someone is an employee vs. an independent is the amount of control the employer places over an individual to perform the work.  There are other factors to consider, but control of the end result is extremely important to assess so as not to misclassify the relationship.

The two forms of control the IRS will look at to determine the nature of the business relationship are:

• Financial Control
• Behavioral Control

Financial control can be described in simple terms as does the individual contractor have a financial interest in the endeavor, that is, do they have anything invested in the process besides their time (equipment, etc) and would they recognize a profit or loss from the activity.  

Behavioral control would include a business dictating how something is to be done, when someone needs to come in to work, and  where the work is to be performed.

Proper evaluation of an employee/independent contractor situation before making the decision to bring someone on board is vitally important. Assessing whether someone is an employee or independent contractor can be difficult to determine.  LFC can help with these assessments.  Contact LFC to discuss work classifications for your business.

Sales Taxes

Sales tax complexity

 Sales tax compliance can be challenging for businesses.  One needs to understand not only what items or services are taxable, but also what rate is applied to transactions.  

In Minnesota, sales tax rates are assessed based on where a product is delivered, not where the transaction originated.  Plus, if a business has sales in other states, one needs to determine if those sales are taxable, and assess whether the volume of sales in a particular state (sales threshold) or total number of sales within the state (sales transactions) meets its reporting criteria.  Once the threshold criteria have been met for a particular state, a business will need to register with a state's Department of Revenue in order to file sales tax reports in the future.

The state of Minnesota provides Sales Tax information to guide businesses through this process.  You can find it here.  Streamline Sales tax reporting can help with sales tax issues in other states.  This information can be found here.

The state of Minnesota's complex sales tax system is compounded by the number of entities that assess a sales tax.  Many counties and cities have imposed sales taxes.  Here you will find a guide (thru 9/30/26) of sales tax rates for the many municipalities that impose a sales tax in the state.

Quickbooks software

Quickbooks software can manage sales taxes for businesses.  Whether a business is a stand-alone retail operation, or a business that distributes its products to a wider geographical area, Quickbooks can handle the process.  For more complex sales tax situations, 3rd party apps are available to work with Quickbooks to properly calculate sales taxes. 

If you need assistance with sales tax issues, contact LFC.

Possible expansion of capital gains exemption on home sales

Recently, there has been discussion by the Trump Administration to expand the capital gains tax on home sales.  Due to significant increases in home prices and low inventories of existing homes, the discussion is important.

Let's review the tax provision as it currently sits.  The existing law goes back to 1997 where the following parameters were put in place:

Excluded gain on sale of home                               Filing status

250,000 or less                                                        Single

500,000 or less                                                        MFJ

The 1997 law was significant legislation and provided considerable tax relief to taxpayers for selling their homes.  However, since that time, there has been no indexing gains to inflation.

Right now, this is an idea has been brought up for discussion.  It will take an act of  Congress  to draft the legislation, plus a vote in the affirmative along with a signature from the President for it to become law.  We don't know what form this proposal will eventually take, but LFC will be watching  the development of this idea in the weeks and months ahead.

Consulting Businesses - accounting for retainers

 In the consulting business, retainers are received from clients for future work on projects or on-going consulting services.  How to handle this for accounting purposes is an important concern.  

First of all, if the consulting business accounting system operates on a cash basis, the receipt of a retainer would be recorded as income even through no work has been done yet to be applied against the retainer received.  Therefore, a system outside of the accounting system, perhaps a spreadsheet, would monitor hours worked and applied against the retainer.  

If the accounting system is an accrual system, the initial receipt of the retainer is recorded as Unearned Revenue.  This means that the receipt of the retainer does not generate income.  Work performed and invoiced against the retainer is when the income is earned.  Once work is performed, invoices can be created and applied against the retainer based on how work is charged: per hour, flat rate, etc.  

If charging customers by the hour, one could make use of Quickbooks timesheets to monitor time charged against a project and applied against an already received retainer.  This will help keep track of the work performed as well as know how much of the retainer has been used.

Keep in mind, if a retainer has not been fully exhausted, the remaining balance would be a liability for the company and owed back to the customer.  

If your business accepts retainers and is unclear how to handle them, contact Liberty Financial for more information.

2026 Tax Preparation - things to know

 Some key provisions of the One Big Beautiful Bill Act (OBBBA) of 2025 kick in for 2026 or are adjusted for inflation.  Below is a short list of important items for the 2026 tax preparation season:

1.  Educator expenses of $350 to be deducted without itemizing.  Excess of $350 can be deducted on Schedule A and not subject to 2% AGI limitation.

2.  $2500 of Education loan interest is deductible.

3.  Annual gift tax exclusion amount is $19,000.

4.  Standard mileage (use of car for business, charities, or medical) per mile:

      a.  Business - 1/1/26 to 6/30/26:   72 cents; 7/1/26 to 12/31/26:   76 cents

      b.  Charities - 14 cents

      c.  Medical - 1/1/26 to 6/30/26:  20.5 cents:  7/1/26 to 12/31/26:  23.5 cents

5.  Recipients of 1099 Misc or 1099 NEC:  reporting organizations will issue forms if amount paid to qualifying individuals is $2,000 or more (prior to 2026 amount was $600).

6.  Child and Dependent Care credit - up to 50% of expenses (prior years: 35%)

7. Mortgage insurance premiums are included as qualified mortgage interest.

8.  Gambling losses are reduced to 90% of losses against gambling winnings.

9.  SALT (State and local tax) deduction limitation raised to $40,400 for 2026.

10.  Charitable deduction of $1,000 ($2,000 for Married filing jointly) for non-itemizing taxpayers.

11.  529 Education Plans - distribution increase from $10,000 to $20,000 for elementary and secondary school expenses in 2026.

 

These are some of the provisions of the OBBBA for 2026 to be aware of.  LFC can help taxpayers learn more about the 2026 filing season and what other items of the law may impact them.  

Contact LFC for more information or set an appointment.      

Errors on financial statements in Quickbooks

As a Quickbooks Pro Advisor, Liberty Financial has offered assistance to Quickbooks users in assessing and correcting problems with financial statements.

Many errors result from incorrect item set up or lack of understanding of basic accounting.

Here are some examples:

1.  Adding items to the item list:  the item list is used to populated forms such as invoices, sales receipts, sales orders, purchase orders, and bills.  The items direct the transactions to the chart of accounts.  If the item is tagged to the incorrect account on the chart of accounts, the financial statements will be incorrect.  It is important to know when an item is to be coded as income, expense, or an inventory item as it is used on a form.  

2.  Treating all payments as expense - payments for credit cards or loans should not be treated as expenses.  These are liability payments.  The expenses are the actual charges on the credit card statements and the interest component on the loan payment. These are the charges that should be reflected on the income statement, not the payment to reduce the loan or credit card balance.  Those payments impact the balance sheet.

Basic accounting requires an understanding of the accounts on the chart of account list:

Assets - items owned by the company:   cash, accounts receivable, fixed assets, inventory, and intangible assets such as trademarks and patents.

Liabilities - items owed by the company:   accounts payable, payroll taxes, sales taxes, customer deposits, mortgages loans, vehicle loans, and credit cards.

Capital - net equity of the company (assets - liabilities):  capital consists of cash and property put into the company by the owner; distributions taken by the owners, and retained earnings (sum of profits and losses over the life of the business).

Viewing transactions as a journal entry will help reduce errors on a financial statement. Here are some examples:

Sales:      Debit to Accounts Receivable or Cash

                Credit to Income

Expense:  Debit to Expense (utilities, office supplies, etc)

                  Credit Cash or Accounts Payable

Owner Draw/Distribution:      Debit Owner Distributions (capital account)

                                                  Credit Cash

These are some basic concepts to keep in mind about processing financial data for one's financial statements.    Liberty Financial can help organizations ensure they have credible financial statements, which are vitally important to their success.

Contact LFC today for assistance.

Estimated Tax payments 2026 - 3rd and 4th Quarter

For those taxpayers who need to make quarterly tax payments each year, the 3rd and 4th quarter payment due dates will be coming up soon.  Those due dates are as follows:

• 9/15/26
• 1/15/27

The One Big Beautiful Bill, passed in 2025, has made the necessity to review the estimated tax calculations important.  With its multitude of new provisions and tax savings features, it is vital to know that the calculation for these payments is accurately determined and one is taking full advantage of the law's tax savings as it pertains to one's financial situation.  

Liberty Financial Consulting, Inc. can help you with these calculations.  Contact the office to arrange a time before the September deadline for the 3rd quarter payment.

Trump savings accounts - Recent IRS Ruling

In 2025, the Big Beautiful tax bill created a new savings accounts for kids called 'Trump accounts'.  Although these accounts were created in 2025, they were not available until 1 year after the bill was signed into law (7/4/26).  Much of the bill's highlights can be found here.

The Trump accounts are a new account to save for a child's future.  It has important features and one can access information on the accounts in the link above.  For now, we will focus on the recent IRS ruling.  The ruling brings clarity to whether contributions to these accounts are considered a 'present interest' or 'future interest' for the beneficiary.  Since the child does not obtain the funds until he or she reaches 18, this distinction is critical as it relates to gift tax returns.

A present interest is a gift that provides immediate ownership of the gift by the recipient.  This gift qualifies under the annual gift tax exclusion, which in 2026 is $19,000.  A future interest gift, or a gift for which future ownership is derived, does not.   This is important because a future interest gift, or a gift greater than the annual exclusion amount, triggers the necessity to file a gift tax return. The current  ruling by the IRS has deemed contributions to Trump accounts as present interest gifts. The clarity presented by the IRS ruling has now paved the way for these accounts to be considered a significant  vehicle for child savings without having to file another tax return.  

Keep in mind most gift tax returns do not produce a tax liability for taxpayers.  The gift tax produced on the gift tax return is off-set by the unified lifetime credit for gifts and estates.  However, it is required to be filed if one gives recipients a future interest gift or a gift greater than the current year exclusion amount. 

Big Beautiful Bill - July 2025

The Big Beautiful bill was passed and signed into on July 4, 2025.  This is a significant piece of legislation that, most importantly, made permanent the tax provisions of the 2017 Tax Cuts and Jobs Act.  The 2017 law was set to expire on 12/31/25.  Had it not been extended or made permanent, the law would revert back to pre-2017 provisions.  This would have imposed a large tax increase on taxpayers.

This brings certainty to the tax code.  Individuals and businesses can now engage in tax planning with greater confidence in the future.

Below is a summary of the bill:

Big-Beautiful-Bill-Recap-July-2025.pdf

January 2025 Newsletter

The January 2025 LFC newsletter is available.  It can be obtained here.

Additional newsletters will made available at future dates covering a wide range of topics and insight from years of experience and knowledge of the accounting and tax industries.

Other items for 2024 tax preparation

Here are other items for the 2024 tax preparation at LFC:

1.  Engagement letter - tax preparation agreement can be found here.

2.  Organizing checklist can be located here.

Use the organizing checklist to gather documents as they are obtained during the weeks ahead.  A signed letter of engagement should be provided to LFC before work is to begin on the tax return (and any payment of pre-paid fees).

Contact LFC for any questions.

accounting@lfconinc.com    

Tax preparation for 2024

LFC is beginning the process of getting ready for the 2024 tax season. LFC encourages clients to act early in gathering tax documents and scheduling meetings.  Below is a short item list as we begin preparing for the 2024 filing season:

Business Clients

• Set appointment with LFC before the end of the year to review current business status and to determine estimated business income for 2024. Discussion should also include major changes that occurred in 2024.
• LFC will work with business owners to determine 4th quarter 2024 estimated tax payment due in January 2025, if payment is necessary. Or, if scheduled payment needs to be adjusted due to changes in business conditions in 2024.
• Contact payroll processor to determine if there is any missing information on employees before W2s are produced in January. Other payroll reports due in January are 941, 940, and MN wage reports for MN Department of Revenue and MN Unemployment.
• Determine if there are vendors who have not provided W9 information.  W9s need to be received before 1099s can be completed in January. 1099 vendors include non-corporate service providers and landlords.  1099s are also due to lawyers for services provided businesses. 
• Ensure all bank reconciliations are completed before tax return is started.  This includes credit card statements.  
• Update fixed asset list to include changes in 2024 such as major purchases and disposals.
• Provide information on employee and benefit changes during 2024.
• File Beneficial Ownership Information (fincen) report for any active business by 12/31/24 if you have not done so.  For those businesses formed in 2024, check the link for due date. (click here for website).

Individual Clients

• Set appointment with LFC to discuss 2024 tax liability prior to the close of 2024 (before the end of December).
• LFC will work to determine 4th Quarter estimated tax payment, if necessary. Or, make changes to scheduled estimated tax payment due in January 2025.
• Be prepared to collect tax documents as they arrive. Checklist will be available by LFC in the near future to serve as a guide for taxpayers during the tax season.
• Once documents are received, set an appointment or ask LFC to send secure link to transfer data.

For the 2024 tax season, LFC will be working to improve efficiency in processing tax return.  By being better organized and minimizing data transfers, the tax return process will be a much better experience for the client.

Tax year 2025

 Earlier this month, the IRS has released Revenue Procedure 2024-40 to provide information on adjustments and changes for the 2025 tax year (returns filed in 2026).

Check out the link below for the details:

Revenue Procedure 2024-40

Tax policy - the importance of elections

 With the election coming up in November, it is important to understand what is at stake in regard to tax policy and its impact on the economy at large.

At the end 2025, the Tax Cuts & Jobs Act from 2017 is set expire if not renewed or extended.  This has been a significant tax law for taxpayers, particularly middle income taxpayers and small business owners.  Here are some features of the tax law that have provided significant tax savings:

1.  C corporations taxed at a flat 21%

2.  20% deduction for Sole proprietorships and pass-throughs (S Corps and LLCs)

3.  Increased standard deductions across the board (Single, MFJ, MFS, H of H)

4.  Expansion of the tax brackets (more income taxed at lower rates)

5.  Child credit of $2000 per child and $500 credit for other dependents

These are just a few of the items that will go away if the law is not extended or renewed.  When voting in the upcoming election, it is important to consider the impact of one's vote on important tax policy and which candidates are likely to continue supporting this important legislation or would support repealing it. 

After the election, taxpayers will have to be vigilant in their tax planning regardless on which candidate wins.  However, it will be much better for taxpayers if the candidates that get elected will support this legislation.  

LFC can help taxpayers with their tax planning needs.  Contact the office to set a time to discuss your individual situation:

Appointments:   Online scheduler for Liberty Financial Consulting Inc. in Roseville, MN (fullslate.com)

Email at:   info@lfconinc.com