Often swamped with paperwork, many entrepreneurs wonder how long you should keep business records. The answer depends a great deal upon whom you ask and what the record pertains to in your business. The IRS sets some basic record retention standards for tax records. Yet lawyers, accountants, banks and government agencies all seem to have different ideas about how long to retain business records depending upon your individual business circumstances. In our digital era, both paper and electronic documents need to be considered in your record preservation plans. Here are some basic record retention rules to think about for your business.
- Business Income Tax Returns and Supporting Documents. It makes sense to keep a final copy of your business income tax returns and related correspondence with the IRS permanently to help you prepare future or amended returns. The IRS recommends that you retain supportive records that corroborate any business income or deductions claim until the “period of limitations” expires for that tax return. The period of limitation is the time period from your filing date in which either you might seek to amend your return for a credit or refund or the IRS may pursue your business for additional taxes. Typically, the IRS can come after your business for failing to report income for up to 6 years after your filing if the amount is greater than 25% of your business’s gross income. If you filed for a deduction for a bad debt or worthless security, the IRS suggests you keep your supporting tax records for 7 years. Under these circumstances, you may generally wish to retain your supportive records for at least 7 years.
- Employment Tax Records. If you have employees, the IRS suggests that you retain all employment tax records for a minimum of 4 years after the date those taxes were due or were paid, whichever is later. These employment tax records include such items as your employer identification number, amounts and dates of wage, annuity and pension payments and tax deposits, the names, addresses, social security numbers, dates of employment and occupations of employees and records of allocated tips and fringe benefits.
- Business Asset Records. If business property is involved, the IRS recommends retaining your records until the period of limitations ends from the year you disposed of that property. These records will aid you in calculating applicable depreciation, amortization or depletion deductions and to determine any gain or loss on that property. If the business property is real estate or a vehicle, keep the deed or vehicle title in a safe, secure spot until you sell or otherwise properly dispose of that property.
- Business Ledgers and Other Key Documents. CPAs tend to be a conservative group and will often recommend that businesses keep their journal entries, profit and loss statements, financial statements, check registers and general business ledgers permanently. Similarly, major business documents, like annual reports, corporate by-laws and amendments, Board of Director information, annual meeting minutes and business formation documents, should also be retained on a permanent basis. Aside from supportive tax records, other documents such as accounts payable/receivable ledgers, invoices and expense reports should be retained for a minimum of 7 years.
- Human Resources Files. You may have numerous other employment files related to current and former employees and applicants to your firm. Excluding employment tax records, files relating to current employees should be retained while they are working for you and at least 7 years after a current or former employee has left or been terminated. For any job applicants who were not eventually hired, keep these files for at least 3 years. If an employee has suffered an accident on the job, consider retaining those records for at least 7 years after that matter was finally resolved or up to 10 years after which any workers compensation benefits were paid. If an employee lodged a discrimination claim against your business, consider retaining those records for at least 4 years after the case is finally concluded. Think about keeping records of employee benefit, pension payment or profit sharing plans permanently.
- Cancelled Checks. Cancelled checks without a tax or other significant business purpose can normally be destroyed after about 7 years. If a cancelled check is a supporting tax document, then follow the IRS rules discussed above.
- Bank Account and Credit Card Statements. Generally, these records should also be retained for about 7 years. This retention period may be longer if they are supporting documents for tax purposes. However, if these statements have no tax or other key business purpose, then consider retaining your business’s detailed annual statements for 7 years and disposing of underlying monthly statements after about a year.
There may be times when you must suspend your usual record disposal plans, such as when litigation is likely or pending on a business matter. You may wish to consult with your attorney or tax professional to look into your individual circumstances to help guide your particular business on its record keeping and disposal policies. To avoid identity theft and to protect sensitive business information, be sure to properly dispose of or shred appropriate business records. For more on tax record keeping and retention, check out IRS Publication 583, Starting a Business and Keeping Records at www.irs.gov/pub/irs-pdf/p583.pdf.