As another Tax Day comes and goes, you may find yourself wondering how long you actually need to hold onto your records and documents. To avoid a cluttering of tax returns, receipts, canceled checks and other financial records, you should keep yourself abreast of the general tax recordkeeping and document retention guidelines.
What’s in this article?
- Why is it important to keep good records?
- What are some general rules to follow?
- What are some record-keeping rules specifically for small businesses?
- What receipts should I keep for tax purposes?
- What should I do with property-related records?
- How should I store my documents?
- Once the period of limitations is up, can I get rid of the records?
- How can Squar Milner help?
Why is it important to keep good records?
At the end of the day, recordkeeping helps with a number of business tasks like monitoring your business progression, preparing financial statements, and completing tax returns. Even after you file your taxes, it is important to hold on to your older records so that they are available at all times for an Internal Revenue Service (IRS) inspection.
If the IRS examines any of your tax returns, they may ask you to explain or clarify certain items reported. This is where a complete set of records comes in handy. Not only does it make the process more efficient, but it can eliminate any uncertainty or questions of wrongdoing.
What are some general rules to follow?
The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return expires.
The period of limitations refers to the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects that periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the filing date of the return. Treat returns filed before the due date as filed on the due date.
Note: Be sure to permanently keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
Periods of limitations that apply to income tax returns
Per the IRS, the following rules apply for income tax returns:
- Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or a bad debt deduction.
- Keep records for 6 years if you did not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
What are some record-keeping rules specifically for small businesses?
- Always keep receipts, bank statements, invoices, payroll records, and any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return.
- Go paperless, store everything electronically, and always make backups.
- Expenses that are less than $75 or that have to do with transportation, lodging, or meal expenses might not require a receipt. However, you must tell the IRS where and when the expense occurred, and what it was for.
- Even if you don’t need a document to do your taxes, you might need it for something else (e.g., insurance, creditors, etc.). When in doubt, hang onto it.
What receipts should I keep for tax purposes?
The IRS requires that you preserve documentation related to income, deductions, and credits reported on your tax return.
Some examples of records small businesses should keep include the following:
- Cash register tape receipts
- Deposit information (cash and credit sales)
- Canceled checks or other proof of payment/electronic funds transferred
- Credit card receipts and statements
- Bank statements
- Petty cash slips for small cash payments
- Accounts payable and receivable
- Payroll records
- Tax filings
- Previous tax returns
- W2 and 1099-MISC forms
Other documents, not necessarily tax-related, that you will want to keep as well include:
- Any contracts signed (with clients, vendors, contractors, employees, etc.)
- Articles of incorporation
- Business permits
- Company health, safety, and any other regulatory documents
- Annual reports
For more information about the specific documents you will want to maintain, please refer to the list provided by the IRS.
Ultimately, it is up to you to manage the burden of proof for each item on your tax return. Therefore, it is critical to maintain sufficient documentation. For small businesses, try to retain as many records as you can. Though it may sound daunting, this is where digitizing your records becomes especially useful.
How should I store my documents?
According to the IRS, you can use any recordkeeping system as long as it “clearly shows your income and expenses.” However, as we continue to move into an increasingly digital world, you should try to go paperless and store everything electronically. Plus, the IRS can accept electronic accounting records from most popular accounting software programs and may request these in order to reduce the need for printed paper or follow-up requests.
Not only does digitizing your records reduce clutter and make processes more efficient, it also helps to prevent accidentally disposing or damaging physical paperwork.
If you choose the paperless route, remember to keep a backup copy of your documents in a secure second location, like a password-protected hard drive or a secondary cloud storage service.
Once the period of limitations is up, can I get rid of the records?
Taxes might be one of the most important reasons for business recordkeeping, but before you dispose of any records you need to double check to determine whether they are needed for any other business concerns. For example, creditors, business lawyers, and insurance companies may require you to keep records for a longer period of time than the IRS calls for.
Again, this is another reason to transition to electronic recordkeeping. Rather than worry about whether or not you can finally throw out your old records, you can archive them permanently in digital form.
How can Squar Milner help?
Not only are we here to deliver exceptional Tax services, but we can also help with your accounting procedures as well. We offer expansive Outsourced Accounting services to help you maintain diligent accounting practices to ensure that your company is compliant with the evolving accounting standards.
Our team can work with you to maintain and preserve thorough and complete tax and accounting records so they are easily accessible for you when you need them.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.