Record retention guidelines

This time of year is good for spring cleaning of all sorts. As clients dig out their tax records they come across old bank statements, real estate records and other mounds of paper gathering dust. Then they ask us if it's necessary to keep all of this clutter. Here are some general guidelines on how long to keep certain records.

Keep these records forever...

Copies of tax returns
Tax and legal correspondence
Audit reports
Contracts and leases
Real estate records
Corporate minutes and stock records

Keep these records for a minimum of six years...

Bank statements
General ledger and journals
Sales records and journals
Personal investment records (starting from date of sale)
IRA records (starting from date of withdrawal)

Keep these records for a minimum of three years...

Employee expense records
Canceled checks
Paid vendor invoices
Employee payroll records
Depreciation records (starting with the end of the asset's tax life)

These are general guidelines and if you search the web you will find others with varying time periods. One of my favorites is several years old but still valuable for the specific categories it covers. You can get it online from the Massachusetts Society of CPA's. You should consider the above guidelines minimums when deciding which records to keep and which ones to destroy.


How to hire your next consultant

I get called in to help businesses solve problems and
this often involves hiring other professionals with
expertise in particular areas. This role has taught me a lot about what clients look for when they're considering hiring me for a new consulting engagement and I use these same rules when I have to hire someone or provide a referral for a client.

  1. Focus on results. If I hire a real
    estate broker to sell a client's property I am not
    concerned with how they list the property or if it
    gets put on a featured web page. All I am interested
    in is the result...sell the property for maximum gain
    within the target time frame. Hire professionals who
    focus on results and do not get bogged down in the

  2.  Professionalism required. A bad
    relationship has the potential to damage my
    reputation. More importantly it can result in failure of
    the project and lost opportunities for my client.
    Professionalism is a must, those without it don't get
    in the front door.

  3. Get out of the way. Good professionals
    focus on
    objectives, listen to the client's need and then
    execute. My checking in or keeping tabs or
    demanding status reports only impeeds their progress
    and delays the project. Don't meddle.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).


The Power of Forecasting

A big part of my job is helping startups take a great idea
and turn it into a viable business. In that role there are few tools I use as
often as financial forecasting or modeling. Mention financial forecasting and
most people just glaze over. Worse, many business owners never see the need for
building a financial forecast. They will establish sales targets and cost
budgets but going that extra step to build a comprehensive financial model is
seen as so much black magic reserved for SBA loan analysts and venture capital

Another area often confused with financial modeling and
forecasting is business plans. You can jump online and find dozens of companies
willing to build a business plan for you, even though they know nothing about
your business. Don’t get me wrong I think a well written business plan is a
great asset. The problem is that most of them are a bunch of pie in the sky
narrative fluff that’s worth less than the paper it’s printed on. The fact that
SBA loans and soft credit lines are approved on the basis of these things is stupefying.

So what does a good forecast look like? It depends. I’m a
strong believer in customized solutions and for that reason forecasts often key
on different areas depending on the user’s needs or concerns. For instance,
startups are most concerned about the capital it will take to get an idea off
the ground. Investors in expanding businesses want to see forecasts of ROI and
payback periods. Banks are often looking for net margins and ratios compared against
industry norms. Each of these requires a different format, but they all have a
fundamental process in common. Every forecast has two basic elements.

1. An
analysis of currently available facts.

2. A
prediction of future events and conditions.

A model heavy on analysis with little or no focus on future
events is just a rehashing of what has already happened. By the same token a
prediction with no analysis or basis in facts is just hot air. To build a
meaningful, relevant forecast you must have both.

The first step I take when building a model is to understand
the source of revenue. What generates sales, what is the pricing rationale, is
it supported by current market conditions, what is the market size, are
assumptions about penetration or market capture reasonable….and on and on and
on. Building a good model involves questioning every assumption about revenue.
Closely associated with this, but not nearly as difficult is estimating the
cost of producing those revenues. These are the direct costs or cost of sales. How
much raw material and labor are required or how much will the product cost to
purchase from someone else?

The second step is to estimate the fixed costs of the
business. This requires leg work. If you assume $5,000 per month for rent where
is the space located, who did you talk to, is this a negotiated rate or an
initial offer from the landlord, is it a triple net or all inclusive lease, is
there an escalation clause, when was the last time CAM charges increased, etc,
etc. In a good model every expense is questioned, attacked and ultimately justified
on the basis of facts, not guesses.

It goes without saying that models are a lot of hard work
and can be expensive to build when you hire someone who knows what they’re
doing. The alternative, however, is to start spending your own money with only
a foggy notion of the eventual outcome. To most people that doesn’t sound like
a very smart way to do business.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).


When are foreigners not subject to FIRPTA

This question has come up twice in two weeks so I thought I would memorialize it here. Part of my practice is helping foreigners navigate the tangle of laws and regulations associated with buying and selling US real estate. In 1980 congress passed the Foreign Investment in Real Property Tax Act, better known in tax circles as FIRPTA. One of the most prevalent aspects of FIRPTA is the required 10% withholding when a foreign non-resident sells US real estate. Ten percent of the sales proceeds must be withheld at closing and sent to IRS. This is to make sure that the seller files a US tax return in the year of sale to report gain and pay the associated tax. But withholding is not always required.

In this area many long time real estate agents have come across FIRPTA and most title companies are pretty familiar with it. However, the number of real estate professionals in this area has exploded in the last four years so it's not surprising that some people are being given bad advice by those with less experience. There are several exceptions to FIRPTA withholding but I see three most often.

The first exception occurs if a buyer purchases a residence for less than $300,000 from a foreign seller. If the buyer or the buyer's family intends to reside in the property for at least 50% of the days it will be occupied over the next two years no withholding is required. The thing to remember here is that the seller is the one who stands to have 10% withheld and most buyers are reluctant to sign anything with tax implications just so it will save the seller some time and expense. Note that this does not exempt the seller from filing a tax return reporting gain on the sale. It just means that no money is withheld at closing.

The second exception occurs when the seller obtains a withholding certificate from IRS. This is a request for IRS to reduce the amount that must be withheld. For instance if a foreign seller will realize $100,000 of long term gain on a $500,000 home sale there will be $15,000 of capital gains tax owed (15% of 100,000). However, the 10% FIRPTA withholding amount is $50,000. The seller applies for a withholding certificate to reduce the withholding to $15,000. This request usually occurs just before closing. If the request is not approved by the closing date then the whole $50,000 is held in escrow until IRS responds. When the request is approved the seller will receive $35,000 from the escrow account, but must still file a tax return for the year of sale. Withholding certificates can take three to four months to get approved so if the sale occurs toward year end it is usually easier to allow the larger amount to be withheld and get the difference back as a tax refund early the next year.

The third big exception occurs with sellers who are "resident" foreigners. IRS has a 183 day test to determine how foreigners are taxed. Using a formula IRS weights your presence in the US during the last three years. The formula works by taking the days present in the most recent tax year, one-third of the days from the first preceeding year, and one-sixth of the days from the second preceeding year. If the total is greater than 183 you are taxed like any other US citizen. If the number is less than 183 you are taxed as a non-resident alien. Non-resident aliens are subject to FIRPTA, resident aliens are not. There is a misconception among some real estate professionals that if you don't have a US passport you must be subject to FIRPTA, but this is not the case. The seller can provide a written statement to the buyer meeting certain requirements and the FIRPTA withholding requirement will not apply.

Once you deal with these rules in real life situations they are not difficult to understand and apply. However, if no one on the 'closing team' is familiar with FIRPTA the area can be a minefield. Interestingly, the buyers in these situations are often placed in the greatest risk. If withholding is not done properly IRS can look to the buyer for any missing tax. If this happens an ugly fight results between the buyer, the title company, the real estate agent and possibly the seller if still present in the US. The advice as always is to work with people who know what they're doing. If you need referrals to knowledgable real estate agents familiar with FIRPTA give me a call.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).


Increased productivity 2 minutes at a time.

It has been a while since my last post as we are extraordinarily busy pushing toward a Jan 31 deadline. In my continuing battle to find more time and be more effective at work I've come to a realization. I'm a slave to email. We communicate with clients all over the place. Many are in different time zones or even different continents so email is an effective way to track down and disseminate information. I can block out time, I can close the door, I can even have my calls held temporarily. However, for some reason I can't resist the urge to open an email when it shows up and I can't turn it off because it's integrated with our calendar and client database. So every time I hear a ding, or see the little envelope pop up I can't help myself. Until now.

Our software checks email every 2 minutes so my day was being reduced to little blocks of uninterrupted time between email deliveries. I went in and reset the delivery time to 60 minutes and it has made a big difference in my focus and efficiency. Try it, you'll be surprised at how serene life becomes without that little chime going off every 2 minutes.

Note: we use Goldmine with a POP3 setup through our server. Other POP3 configurations in Outlook, etc. offer the ability to set how often the computer checks the server for email. If you are using an Exchange server you may be out of luck, I don't know. If delaying delivery isn't an option maybe you can disable the sounds and icons associated with new mail. All programs allow you to manually check the server if you are expecting an email and don't want to wait.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).