Records Retention Guidelines for Small Businesses
You might think we are close to becoming a paperless society, at least when it comes to the IRS. That would be an incorrect assumption. Even if you recently filed your 2018 tax return electronically, you probably printed out a hard copy for your files. Add that paper to the financial reports, bank statements, receipts, and other business records you’ve been holding onto for years, and it’s likely your filing cabinets are overflowing with paper.
Keeping good records for your business will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns. After filing your business tax return, do some spring cleaning. But don’t just dump old business records without thinking about the process. You might need some of these documents if the IRS ever comes calling. And sometimes, your insurance company or creditors may require you to keep them longer than the IRS does.
The retention guidelines are slightly different for small business records. Here are some best practices to consider.
Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.
For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.
Sales Tax Returns
State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your Brady Ware tax advisor.
Employee and Payroll Records
Keep personnel records for three years after an employee has been terminated. Also maintain records that support employee earnings for at least four years. This time frame should cover various state and federal requirements. However, never throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.
Time cards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it’s a best practice for all businesses to keep the files for several years in case questions arise.
Keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.
Important: The more records you store, the greater the likelihood that your data will be stolen or hacked. Destroying sensitive documents and files can reduce the chances that you or your company’s employees and customers will become identity theft victims.