Guidelines for Business Records: What to Keep, What to Toss
According to the Data Book released by the IRS, the IRS collected more than $3.4 trillion, processed more than 245 million tax returns and other forms, and issued over $437 billion in tax refunds during FY 2017. The agency’s Website continued to get heavy use with over 495.6 million visits to IRS.gov in FY 2017; and one of the most popular online tools, “Where’s My Refund?” handled 278.6 million inquiries. About 70.5 percent of all returns were filed electronically.
You might think those numbers suggest 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 2017 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.
IRS Audits and Amended Returns
Keep your files for the past seven tax years because the IRS can audit your returns for a minimum of three years after you file. You can also file an amended return during this time period if you missed a deduction, overlooked a credit, or misreported earnings.
But you are not necessarily safe from an audit after three years have passed. There are a couple of key exceptions to this general rule:
- The statute of limitations increases to six years if the IRS has reason to believe you understated your earnings by 25 percent or more.
- There is no time limit if the IRS suspects fraud or you do not file a tax return.
Retention Requirements for Business Records
Maintain for at least four years, to meet various state and federal requirements. (However, don’t throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.)
Employee time cards
Keep for at least three years if your business is subject to the Fair Labor Standards Act (engaged in interstate commerce). It is a best practice for all businesses to keep the files permanently in case questions arise.
Retain for three years after an employee has been terminated.
Employment tax records
Keep employment tax records at least four years from the date the tax was due, or the date it was paid — whichever is longer.
Employee business expenses
For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for seven years.
Sales tax returns
State regulations vary. For example, Ohio generally requires sales tax records to be retained for four years, whereas Indiana and Georgia require three years, and Arkansas, six. Check with your Brady Ware tax advisor.
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.
To avoid the clutter of paper records, you can scan all of your documents into a a digital format, such as Adobe PDF, and store them on a secure cloud drive.
Proper Disposal Protocol
One critical step to take when cleaning out financial documents is to shred them thoroughly before you toss them out.