How long do you have to keep business records

Tax Records

While it may be tempting to clear out the clutter and shred old business tax records, tax returns and business documents, it's important to know what to keep and for how long. Although actual tax returns should be kept permanently (including canceled checks from tax payments), the supporting documentation from previous years should be kept until the chance of an audit passes.

Generally speaking, you should keep any tax return and supporting documentation until the statute of limitations expires. For most taxpayers, this means keeping records for at least three years. However, there are some situations where you should keep records for longer. For example, if you file a claim for a loss carryback, you'll need to have records from the previous year on hand. The same is true if you're self-employed or have income from rental properties; in these cases, you should keep records for at least seven years. If you record depreciation expense on capital assets, invoices and any other purchase agreements should be maintained for at least seven years after that asset is sold. No limit exists if you failed to file or filed a fraudulent return. As such, it is wise to keep business tax records for at least seven years after a return is filed. Ultimately, it's up to you to decide how long to keep tax records, but it's always better to err on the side of caution.

Accounting Systems

Audit reports and financial statements from accountants, trial balances, general ledgers, bank statements, journal entries, cash books, charts of accounts, check registers, subsidiary ledgers, and investment sales and purchases should be kept permanently. Other records, such as payable and receivable ledgers, bank reconciliations, bank statements, and cash and charge slips, and any other supporting documents should be retained for seven years.

For certain assets (residences, real estate, stocks, etc.), all statements, invoices, and purchase documents that substantiate cost should be kept, typically for seven years after the asset is sold. Depreciation schedules and asset-inventory records should be kept permanently.

Corporate Records

For any small business, it is important to retain certain corporate records. This ensures that the business is in compliance with annual reports, articles of incorporation, stock ownership and transfers, bylaws, capital-stock certificates, dividend registers, canceled dividend checks, and business licenses and permits. By keeping these records up to date and in a safe place, the small business can avoid costly penalties or legal action. Additionally, having accurate and complete records can help the small business to keep track of its finances and make informed decisions about its future.

Employee Records

As a small business owner, you are responsible for keeping accurate records for all of your employees. This includes maintaining accurate records of their hours worked, as well as their compensation and benefits. Employment tax records should be kept for the duration of each employee’s tenure with your company. In the event that an employee is terminated, their records should be kept for at least three years. This will ensure that you have all the necessary documentation in the event of a dispute. Furthermore, keeping accurate records will help to protect your business in the event of an audit. The IRS has strict guidelines regarding the retention of employee records, and failure to comply can result in significant penalties.

Here is a guideline of the specific types of employment tax records that should be kept:

Keep Permanently:

• W-2 forms
• Payroll tax returns and;
• Retirement plan agreements

Keep For 10 Years:

• Workers' compensation benefits;
• Employee-withholding-exemption certificates; and
• Payroll tax records

Keep for 7 Years:

• Payroll checks
• Payroll records
• Time reports;
• Attendance records;
• Medical benefits; and
• Commission reports

Keep for 3 Years:

• Contractor information upon completion of contract; and
• Tip Substantiation

Insurance Policies

Copies of all current insurance policies should be maintained in separate files and kept for 10 years after the policies expire. Insurance claim paperwork should be maintained permanently. 

Legal Documents

While some documents should be kept permanently, others can be disposed of after a certain amount of time has passed. For example, documents such as bills of sale, permits, licenses, contracts, deeds and titles, mortgages, and stock and bond records should be kept permanently. However, canceled leases and notes receivable can be kept for 10 years after cancellation. In general, it is important to keep track of any documents that might have legal or financial implications. Consulting with an attorney or accountant can help you to determine which documents need to be kept and for how long.

Storage of Documents

To save time and space, consider an electronic storage system to file your data. The IRS has accepted electronic supporting documentation for several years. All requirements that apply to hard-copy books and records also apply to electronic storage systems that maintain tax books and records. The electronic storage system must index, store, preserve, retrieve, and reproduce the electronically stored books and records in a legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS.

With the threat of identity theft, it is also good practice to shred all of the records you no longer need, especially those with personal information. Shredders are an inexpensive means of destroying small amounts of information. However, a personal shredding service should be considered with a large volume of shredding.

The suggested retention periods shown above are not offered as a final authority, but as a guide to determine your needs. If you have any unusual circumstances or wish to delve further into record-retention rules and regulations for a specific industry, you should consult with your CPA, attorney, or other industry professional. This is especially important if you plan on destroying any important legal, business, or financial paperwork.

Trust the Experts

As you can see, there are many factors to consider when determining how long to keep your business tax records. The best thing to do is speak with an accountant or tax professional who can help you create a record retention plan that fits your specific business and filing requirements.

Meyers Brothers Kalicka is a leadingCPA firm in Massachusetts since 1948. We have the expertise to handle all of your tax, accounting, and business needs. We are a full-service firm offering a wide range of services, including auditing, tax preparation, estate planning, and more. Our team of experienced professionals is ready to work with you to achieve your financial goals.