Making Cents: Don't Put Away Those Tax Records Yet

US Wealth Napolitano |

By: John P. Napolitano, CFP®, CPA, PFS, MST

This time of year, many Americans and businesses have already filed their income tax returns. Whether you have filed or are going to be put on extension doesn’t really matter, but it’s what you do with all the tax data and little pieces of paper that matters.

It matters for a few reasons. On the personal side, the receipts, 1099’s and other important tax information that you use to file are your first line of defense in the event of an audit. The IRS has up to three years to audit any tax return, so remember that these records may not even be asked for until thirty-six months after filing. If your number comes up, you’ll be asked to provide receipts and other evidence to prove that you actually incurred that expense. Few of us write many checks these days, so be sure to have your bank and credit card statements close to your tax records for the 3–7 years that you’ll be retaining those records. For deductible items, just getting the item onto your credit card bill before 12/31 qualifies you for the deduction even though you may not have paid the actual bill yet.

Some of your other personal records may be needed for tax purposes, but not necessarily in this year.  Amongst these items are home improvements. Home improvements will be added to your cost basis when you sell the home to determine if there is a taxable gain or not. The rules are different for personal residences than they are for vacation or rental properties. But in any case you may be asked for records to prove things years after their actual occurrence. This could be for tax or other reasons such as to prove to a buyer that you really updated the roofing X years ago.

For business owners, any capital transactions done in any tax year may also cause the need to produce receipts or other documentation years later. Capital transactions may include the purchase of any heavy equipment, the acquisition or renovation of any real estate or any issuance or retiring of shares or ownership interests in the business.

Probably most significant to business owners are matters impacting ownership interests. Ultimately, the cost basis of your business interests will determine your gain or loss upon a full or partial sale. But it also impacts any owners who you have gifted ownership interests. If these are true gifts, the gift recipient will have the same tax cost or basis as the grantor/giver of the ownership interests.

If the ownership interest is not a true gift, but a reward for services, the answer may be completely different. While the grant of an ownership interest in exchange for services may be a taxable event to both the grantor and the recipient, there are both business and tax smart ways to protect the owners and minimize the current tax impact.

Consult with your advisor regarding those records you may need to retain for the future.


John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.