Record Retention Policy: How Long to Keep Business Tax Record

Keeping good records ensures that you have accurate financial statements and that you can assess how your business is doing at any time. Keeping track of your records means that you claim all expenses that you’re allowed — helping to reduce how much you have to pay at tax time. Generally, you must keep the tax record, business records and receipts for a minimum of three years. The three-year rule is in place so that the IRS has up to three years to audit you and assess additional taxes.

However, instead of stockpiling everything, it’s smarter to have an overall plan for keeping your records to make sure you keep the important stuff. LegalZoom provides access to independent attorneys and self-service tools. Use of our products and services are governed by our Terms of Use and Privacy Policy. It’s easy to create a new LLC by filing paperwork with the state.

Businesses in some industries have additional state and federal requirements for recordkeeping. With this in mind, be sure to speak with a small business attorney to obtain a complete list. Besides employee tax information, you should retain the personnel records for every person you employed. These records can help you guard against future suits and claims against your business. First, the service pairs you with a CPA who is an expert in your state and industry and can answer the tough questions you have about your business. Second, while many others charge by the hour, or worse, by minute, 1-800Accountant sets you up with an affordable, flat-rate pricing plan so you always know what you’ll be paying.

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If you can’t support all the deductions you’ve claimed, you will lose them. They can keep your personal and professional purchases separated. Employee files should be kept for 7 years after the employee is no longer working for you- whether due to retirement, termination, or resignation. If the employee sustained an injury while at work or if they filed a lawsuit against the company for any reason, you’ll need to keep those records for 10 years. Secondly, keeping track of your records is a good business practice.

It’s critical to know both federal and state periods of limitation for audits and their requirements for document retention. An accountant can explain how your business can meet these requirements and the penalties you may face for failing to do so. The IRS says you can use any recordkeeping system as long as it “clearly shows your income and expenses”. But unless you’re auditioning to appear on an episode of Hoarders, you should probably go paperless and store everything electronically. Any business deduction on your tax return can be questioned during an audit—even expenses under $75. Good business recordkeeping lets you prepare financial statements, helps you keep tabs on your expenses, and comes in handy if you ever get sued or audited.

Bank statements, credit card statements, canceled checks, paid invoices and other financial information quickly pile up. Experts advise that you keep these documents for at least seven years after an employee leaves or is fired. In addition, if an employee was injured How long should you keep business records on the job, you should keep any related records for up to ten years after worker’s compensation was paid. Sooner or later most small business owners will face a legal dispute. The best way to handle these disputes is usually through mediation and arbitration.

Why should you keep business records?

However, the following are some of the most common questions about keeping business records. You’ve maintained careful business records for three years or even longer. Since you’re probably in the clear from the IRS, you could dispose of your documents, taking care to shred them to prevent sensitive data from falling into the wrong hands. However, if the IRS suspects a major tax violation, it can investigate as far back as six years. Therefore, you may want to play it safe to protect your business and keep all tax records and related documents for at least six years. Below, we’ll review the legal retention requirements for the most common business records and discuss best practices.

Many companies store such documentation in a corporate binder. Keep the binder in a safe space (even if it just collects dust). It’s one of the first things that will be requested should you want to sell your company or be involved in an audit or lawsuit. Lastly, keep in mind that you’ll need to keep originals for important documentation. These are things like articles of incorporation, business licenses, partnership agreements, and any signed contracts.

While you don’t have to go completely paperless, consider creating a digital version of your business records. With only an inexpensive scanner, you can create a back-up copy of important documents. Then, simply upload files to a cloud-based storage option like Dropbox, Google Drive or your business management software. You and your employees can snap a picture of paper receipts and send it straight to your accounting software.

Whether you’re wondering how long to keep bank statements or how long to keep pay stubs, business record retention is critical for your financial record keeping. Read on to learn about retention periods for your accounting documents. There’s a lot to keep up with when you’re running your own business—inventory, payroll, business licenses, and of course, business tax records. But how long do you actually need to keep the paper trail going and the file cabinets overflowing?

Exceptions to the Rule

Record keeping is a dull subject matter, but it’s an essential task as if you make the wrong choices, you face litigation and problems with the IRS. Understanding how long you should keep these records will help you avoid these problems. The tax arena provides the greatest framework for how long tax preparation documents and returns should be retained.

For most businesses, this is going to be the primary source for information related to your income and expenses. Each transaction in your business bank account should have more evidence to support it. Digitalization of your tax record helps avoid any accidental loss of data for any reason. Moreover, in case if any of the paperwork fades or retain damage, you can produce the e-copy. IRS will never believe that “your dog ate the tax records.”

What if I don’t have a receipt?

The IRS requires you to keep records that support the income you received and the deductions that you take. So if you claim a deduction for a training course or a client lunch, the IRS wants you to keep the details of that — you may be asked about them at a later date. In case your original tax return records are lost or destroyed, you can always obtain a duplicate transcript or copy of your tax returns from the IRS.

You’ll then also want to keep supporting documents in your records that show the date, cost, attendees and business reason for the meal. If you have an expense that is less than $75, you don’t need to have a receipt to support it. You also don’t need to keep documentation if it’s for a transportation expense and documentation isn’t easy to get. And if you have meals and lodging expenses that you report under an accountable plan for a per-diem allowance, you won’t need to keep your receipts. While you digitalize your data, you can still keep a backup of all your tax records for the business. Simply use a cloud-storage or an encrypted/password-protected hard-drive.

Check with your accountant or a tax professional before tossing any major records. If your business is incorporated, you need to keep business finances and personal finances separate. Your business records need to be organized, clear and distinct to avoid audits. On the other hand, sole proprietors can mix both categories—and have to be extra careful to keep all relevant records. We’ll go over which records you need to keep and how long you need to keep them. Then you can use our 5 tips to protect your business documents in the long term.

Besides safekeeping important data digitally, some software solutions can also help companies make their business operations more efficient. These documents may come in physical form, such as copies of records stored across multiple document libraries or filing cabinets. Organizing your physical and cloud-based storage along with developing a DRP is the best way to ensure your organization complies with record-keeping standards. Review all guidelines carefully and come up with a plan that’s easy to implement and stick with.

Business advisors would stress the importance of keeping these business records indefinitely, as they provide validation that you own the business. Your insurance documents can likewise provide guidance for filing a claim. They also offer a record that your company is covered for specific events. The answer varies, depending on whether you’re talking about bank statements, tax records, or other kinds of business documents.

• Each transaction in your business bank account should have more evidence to support it.
• Keeping business records takes time and space, but the benefits are worth the sacrifices.
• (These time frames are known as “periods of limitations.”) But it’s a good idea to use seven years as your guide for keeping these documents.
• Jesus Morales is an Enrolled Agent and has 7 years of bookkeeping and tax experience.
• The IRS recommends you back up your paper documents electronically in case of flood, fire, or other disaster.

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For Title VII and ADA, the requirements kick in when you have 15 or more employees; it’s 20 or more employees for ADEA. If your company meets these requirements, you’ll need to keep all hiring records for each position for at least one year from the date of the hiring decision. Keeping business records takes time and space, but the benefits are worth the sacrifices. It’s more important to be prepared than have extra filing space. You might want to consult a professional tax advisor for specific advice about your business.

If you apply for any of the best business loans out there, you’ll be asked for supporting documents like your tax returns, bank statements, and financial documents. If you don’t have solid business credit scores, you may also be asked for a personal financial statement and details about your personal gross income. If you have employees, you must keep all records dealing with federal and state payroll taxes for at least four years. In fact, you can be downright inundated with records… from tax returns and expense receipts to invoices, cancelled checks, payroll records, bank statements, meeting minutes—the list goes on. Typically, the IRS will only audit taxes from the past three years.