Learn More: To Know More About Tax?

As a business owner, you must know all tax pitfalls, that’s why our business planning department is working for you

The United States of America is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2010 taxes collected by federal, state and municipal governments amounted to 24.8% of GDP. In the OECD, only Chile and Mexico taxed less as a share of GDP. The United States also has one of the most progressive tax systems in the industrialized world.

Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source. Most business expenses reduce taxable income, though limits apply to a few expenses. Individuals are permitted to reduce taxable income by personal allowances and certain nonbusiness expenses, including home mortgage interest, state and local taxes, charitable contributions, and medical and certain other expenses incurred above certain percentages of income. State rules for determining taxable income often differ from federal rules. Federal tax rates vary from 10% to 39.6% of taxable income. State and local tax rates vary widely by jurisdiction, from 0% to 13.30% of income, and many are graduated. State taxes are generally treated as a deductible expense for federal tax computation. In 2013, the top marginal income tax rate for a high-income California resident would be 52.9%.

Payroll taxes are imposed by the federal and all state governments. These include Social Security and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3% for 2011 and 2012). Social Security tax applies only to the first $106,800 of wages in 2009 through 2011. However, benefits are only accrued on the first $106,800 of wages. Employers must withhold income taxes on wages. An unemployment tax and certain other levies apply to employers.

Property taxes are imposed by most local governments and many special purpose authorities based on the fair market value of property. School and other authorities are often separately governed, and impose separate taxes. Property tax is generally imposed only on reality, though some jurisdictions tax some forms of business property. Property tax rules and rates vary widely with annual median rates ranging from 0.2% to 1.9% of a property's value depending on the state.

Retaining Records

You have to maintain copies of your tax returns and supporting documents for at least three years according to Federal law. It leads many people to believe they're safe provided they retain their documents for this period of time, which is generally referred to by the term of the: three-year-law". However, the IRS may go back six years in an audit, if they believe you have significantly under reported your income (by 25 percent or more), or believes there may be hints of scam. In such cases we advise to Create and store a backup set of records electronically.

Now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet, it is much easier for you to keep a backup set of records -including, for example, tax returns, bank statements, insurance policies, etc. Reports now can be scanned and converted to a digital format, even if the original records are provided only on paper. Taxpayers can download them to a backup storage device, like burning them onto a CD or DVD, or store in an external hard drive, once the documents are in electronic form. Online backup can also be considered, which is the only way to ensure that data is fully protected, because with online backup, there's no chance that a natural or a man-made calamity can destroy your records.

Business Documents to keep for at least three Years

• Duplicate Deposit Slips
• Employment Applications
• Correspondence with Customers and Vendors
• Receiving Sheets
• Requisitions
• Purchase Orders (other than Purchasing Department copy)
• Stockroom Withdrawal Forms
• Stenographer's Notebooks

Business Documents to keep for at least Seven Years

• Employment Applications
• Expired Insurance Policies
• Employee Personnel Records (after termination)
• Internal Audit Reports
• Internal Reports
• General Correspondence
• Physical Inventory Tags
• Petty Cash Vouchers
• Time Cards For Hourly Employees
• Savings Bond Registration Records of Employees
• Accounts Payable Ledgers and Schedules
• Accident Reports, Claims
• Accounts Receivable Ledgers and Schedules
• Cancelled Checks
• Bank Statements and Reconciliations
• Employment Tax Records
• Cancelled Stock and Bond Certificates
• Expired Contracts, Leases
• Expired Option Records
• Invoices to Customers
• Expense Analysis and Expense Distribution Schedules
• Payroll Records and Summaries, including payment to pensioners
• Inventories of Products, Materials, Supplies
• Notes Receivable Ledgers, Schedules
• Purchasing Department Copies of Purchase Orders
• Plant Cost Ledgers
• Subsidiary Ledgers
• Sales Records
• Vouchers for Payments to Vendors, Employees, etc.
• Time Books
• Travel and Entertainment Records
• Voucher Register, Schedules