Keeping Good Records of Your Credits
California has many credits that California taxpayers and businesses may benefit from. Tax laws regarding tax credits are always changing, but there are tax credits qualified taxpayers can use to reduce their tax liability. Since tax credits directly reduce a qualified taxpayer’s tax liability, they can save your clients more than a tax deduction. For example, for taxable years beginning on or after January 1, 2012, and before January 1, 2017, California has a new Donated Fresh Fruits or Vegetables Credit, as an alternative to claiming a deduction. Qualified taxpayers who make a qualified donation of fresh fruits or fresh vegetables to a California food bank and received the required certificate acknowledging the donation will be able to claim a credit equal to 10 percent of the costs, as specified. Any unused credit may be carried over and used in the following seven years.
Tax credits are usually enacted as incentives to do something, like encourage business investments and promote the creation of new jobs. For example, California’s New Jobs Credit which allows small business owners, who had 20 or fewer employees on the last day of the previous taxable year, to claim a credit for each additional full-time employee hired. California allocated $400 million for this tax credit. As of October 6, 2012, the cumulative total amount of New Jobs Credit generated on personal income tax and business entity tax returns filed and processed is $133,963,239. This credit is allocated on a first-come, first-served basis up to $3,000 for each additional full-time qualified employee.
Now is the time to make decisions to take advantage of tax credits. When it comes to tax credits one thing they all have in common is the need to retain the proper documentation/records for the tax credits you want to claim.
Good tax planning would include looking ahead at what credits your client may qualify for and determine what records you should keep that will support the tax credit they plan to claim in the upcoming year.
Keeping good records helps you
Having a good recordkeeping system which you keep up-to-date will help you:
- Keep track of qualified expenses.
- Save time and accountancy costs.
- Pay the correct amount of tax.
- Receive the correct amount of benefits or credits.
- Avoid paying any extra tax or penalties.
The records you need to keep
The sort of records you need to keep depends upon the type of tax credit you plan to claim.
How to keep your records
The law does not say how you must keep your records. You must keep some original paper documents which show that tax has been deducted. You can keep all original documents; however, records can be kept electronically (on a computer or any storage device, such as disk, CD, memory stick, or microfilm) as long as the method you use:
- Captures all the information on the document (front and back).
- Allows the information to be presented to us in a readable format, if we need to see it.
How long to keep your records
As a general rule, you should keep your records for as long as you have credit available to be used plus a minimum of four years (in addition to the year a credit amount is claimed).