There Is No One-size-fits-all Answer to This Important Question
By Deb Kaylor
It’s that time of year again! Tax filing season has come to a close, and business tax returns have been filed. For many businesses, this is also a time to purge old files and business tax records.
While it may be tempting to simply throw away old records and business documents, it’s important to be mindful of the different laws and regulations surrounding document retention. Depending on the type of business, there may be certain records that must be kept for a minimum number of years. In other cases, there may be no legal obligation to keep records at all.
“By taking the time to understand the different laws and regulations surrounding document retention and business tax records, businesses can ensure that they are in compliance with all applicable laws and minimize the risk of liability.”
However, even in these situations, it’s often best to err on the side of caution and retain documents and keep business tax records for a longer period of time. By taking the time to understand the different laws and regulations surrounding document retention and business tax records, businesses can ensure that they are in compliance with all applicable laws and minimize the risk of liability. Here are some things to keep in mind when asking how long to keep business records.
While it may be tempting to clear out the clutter and shred old business tax records, tax returns and business documents, it’s important to know what to keep and for how long. Although actual tax returns should be kept permanently (including canceled checks from tax payments), the supporting documentation from previous years should be kept until the chance of an audit passes.
Generally speaking, you should keep any tax return and supporting documentation until the statute of limitations expires. For most taxpayers, this means keeping records for at least three years. However, there are some situations where you should keep records for longer. For example, if you file a claim for a loss carryback, you’ll need to have records from the previous year on hand.
The same is true if you’re self-employed or have income from rental properties; in these cases, you should keep records for at least seven years. If you record depreciation expense on capital assets, invoices and any other purchase agreements should be maintained for at least seven years after that asset is sold. No limit exists if you failed to file or filed a fraudulent return. As such, it is wise to keep business tax records for at least seven years after a return is filed. Ultimately, it’s up to you to decide how long to keep tax records, but it’s always better to err on the side of caution.
Audit reports and financial statements from accountants, trial balances, general ledgers, bank statements, journal entries, cash books, charts of accounts, check registers, subsidiary ledgers, and investment sales and purchases should be kept permanently. Other records, such as payable and receivable ledgers, bank reconciliations, bank statements, and cash and charge slips, and any other supporting documents should be retained for seven years.
For certain assets (residences, real estate, stocks, etc.), all statements, invoices, and purchase documents that substantiate cost should be kept, typically for seven years after the asset is sold. Depreciation schedules and asset-inventory records should be kept permanently.
For any small business, it is important to retain certain corporate records. This ensures that the business is in compliance with annual reports, articles of incorporation, stock ownership and transfers, bylaws, capital-stock certificates, dividend registers, canceled dividend checks, and business licenses and permits. By keeping these records up to date and in a safe place, the small business can avoid costly penalties or legal action. Additionally, having accurate and complete records can help the small business to keep track of its finances and make informed decisions about its future.
As a small business owner, you are responsible for keeping accurate records for all of your employees. This includes maintaining accurate records of their hours worked, as well as their compensation and benefits. Employment tax records should be kept for the duration of each employee’s tenure with your company.
In the event that an employee is terminated, their records should be kept for at least three years. This will ensure that you have all the necessary documentation in the event of a dispute. Furthermore, keeping accurate records will help to protect your business in the event of an audit. The IRS has strict guidelines regarding the retention of employee records, and failure to comply can result in significant penalties.
Here is a guideline of the specific types of employment tax records that should be kept:
• W-2 forms
• Payroll tax returns and;
• Retirement plan agreements
Keep for 10 Years:
• Workers’ compensation benefits;
• Employee-withholding-exemption certificates; and
• Payroll tax records
Keep for seven years:
• Payroll checks;
• Payroll records;
• Time reports;
• Attendance records;
• Medical benefits; and
• Commission reports
Keep for three years:
• Contractor information upon completion of contract; and
• Tip Substantiation
Copies of all current insurance policies should be maintained in separate files and kept for 10 years after the policies expire. Insurance claim paperwork should be maintained permanently.
While some documents should be kept permanently, others can be disposed of after a certain amount of time has passed. For example, documents such as bills of sale, permits, licenses, contracts, deeds and titles, mortgages, and stock and bond records should be kept permanently. However, canceled leases and notes receivable can be kept for 10 years after cancellation. In general, it is important to keep track of any documents that might have legal or financial implications. Consulting with an attorney or accountant can help you to determine which documents need to be kept and for how long.
Storage of Documents
To save time and space, consider an electronic storage system to file your data. The IRS has accepted electronic supporting documentation for several years. All requirements that apply to hard-copy books and records also apply to electronic storage systems that maintain tax books and records. The electronic storage system must index, store, preserve, retrieve, and reproduce the electronically stored books and records in a legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS.
With the threat of identity theft, it is also good practice to shred all of the records you no longer need, especially those with personal information. Shredders are an inexpensive means of destroying small amounts of information. However, a personal shredding service should be considered with a large volume of shredding.
The suggested retention periods shown above are not offered as a final authority, but as a guide to determine your needs. If you have any unusual circumstances or wish to delve further into record-retention rules and regulations for a specific industry, you should consult with your CPA, attorney, or other industry professional. This is especially important if you plan on destroying any important legal, business, or financial paperwork.
Trust the Experts
As you can see, there are many factors to consider when determining how long to keep your business tax records. The best thing to do is speak with an accountant or tax professional who can help you create a record retention plan that fits your specific business and filing requirements.
Frequently Asked Questions
Can the IRS go back more than 10 years?
The short answer is yes, the IRS (Internal Revenue Service) can go back more than 10 years when it comes to business tax records. In fact, there is no statute of limitations when it comes to federal taxes. This means that the IRS can audit your business tax records at any time, regardless of how far back they date. However, the IRS typically only audits businesses for the last three years. So while the IRS can technically go back further than 10 years, it’s unlikely that they will. If you’re worried about being audited, make sure to keep your business tax records organized and up-to-date. This will make it easier for you to respond to any questions from the IRS and will help to ensure that you’re in compliance with all relevant tax laws.
Do I need to hang on to paper bank statements?
Whether or not you need to hang on to your business paper bank statements is entirely dependent on your business and what your needs are. If you’re required to keep hard copies of your bank statements for tax or accounting purposes, then you’ll need to hang on to them. However, if you’re comfortable keeping electronic copies of your bank statements, then you can go ahead and shred the paper copies. We recommend seeking professional advice for your personal business needs from a certified public accountant or tax attorney.
What is the best way to store business records?
Any business owner knows that good record-keeping is essential to the success of the enterprise. Accurate records can help to track inventory levels, monitor financial transactions, and measure performance over time. But with so much data to keep track of, it can be difficult to know how to best store business records. One option is to keep physical records in a filing system.
This can be useful for documents that need to be accessed frequently or for companies that are required by law to keep hard copies of certain records. However, filing systems can be cumbersome and time-consuming to maintain, and they can take up valuable office space.
Another option is to store records electronically, either in the cloud or on an on-site server. This can be more efficient and cost-effective than a physical filing system, but it requires a reliable backup system to prevent data loss in the event of a power outage or other disaster. Ultimately, there is no one-size-fits-all solution for storing business records; the best approach will vary depending on the needs of the individual company.
Deb Kaylor, CPA is a Senior Manager at the Holyoke-based accounting firm, Meyers Brothers Kalicka, P.C.; (413) 536-8510.