It’s tax time and you have piles of receipts, bank statements, tax forms scattered all about. If you work from a home office, filing space is definitely at a premium so here is a guide of what records you need to keep, what you can save electronically and what records you are safe to shred and destroy.
Federal law requires you to maintain copies of your business tax returns as well as your personal tax returns for three years including all the supporting documentation for those returns. The IRS calls this the “three-year law.” However, if the IRS believes you have consistently under reported your income by 25% or more or believes fraud may be involved, they may go back six years for an audit but the requirement to maintain your records is indefinite. It is recommended that you keep copies of all your business and personal tax returns indefinitely. It is also important to note that the statue of limitation does not begin until the tax return has been filed and if the return is considered fraudulent there is no limitation on when the records can be requested.
Listed below is a breakdown of the records you need to save and for how long based on current IRS guidelines. Again, please use common sense to make the right decision between keeping too much or not keeping records long enough. If you have a question about a specific document, please consult with either your accountant or attorney prior to destroying. You certainly do not want to be caught without the requested paperwork if contacted by the IRS.
Business documents to keep for three years:
Bank deposit slips
Cancelled checks
Correspondence with customers and vendors
Credit card statements
Employee personnel records (after termination)*
Employment applications*
Expense reports
Expired Insurance policies
Petty cash vouchers
Physical inventory tags and records
Purchase orders and receiving sheets
Requisition orders
Time cards for hourly employees
Business documents to keep for six years:
Accident reports and claims
Accounts payable ledgers
Accounts receivable ledgers
Bank statements and reconciliation reports
Cancelled stock and bond certificates
Employment tax records
Expense analysis and expense distribution schedules
Expired contracts, leases
Inventories of products, materials, supplies
Invoices to customers
Notes receivable ledgers and schedules
Payroll records and summaries, including payment to pensioners
Plant cost ledgers
Purchasing department copies of purchase orders
Sales records
Subsidiary ledgers
Time books
Travel and entertainment records
Utility records (if tax related)
Voucher register, schedules
Vouchers for payments to vendors, employees, etc.
Business records to keep forever:
Audit reports from CPAs and/or accountants
Cancelled checks for important payments, especially tax payments
Cash books, chart of accounts
Contracts, leases currently in effect
Corporate documents (incorporation, charter, by-laws, etc.)
Deeds
Depreciation schedules
Documents of fixed asset additions
Financial statements, year-end
General and private ledgers, year-end trial balances
Insurance records, including current accident reports, claims and policies
Investment trade confirmations and statements
IRS revenue agents reports
Journals
Legal records, correspondence and other important matters
Minute books of directors and stockholders
Mortgages, bill of sale
Property appraisal prepared by outside appraisers
Property records
Retirement and pension records
Tax returns, worksheets and payment checks
Trademark and patent registrations
Personal documents:
For one year:
You don’t need to save monthly and quarterly mutual fund and IRS contribution statements. You need to keep the year-end statements
For three years:
Credit card statements
Expired insurance policies
Medical bills
Utility records
For six years:
Accident reports and claims
Medical bills (if tax related)
Other tax related bills
Property records and improvement receipts
Real estate – sold property records, contracts, receipts
Sales receipts
Supporting documents for tax returns
Wage garnishments
To keep forever:
CPA audit reports
Important correspondence
Income tax payment checks
Income tax returns and payment checks
Investment trade confirmations and statements
Legal records
Retirement and pension records
Special circumstances:
Car records (keep until the car is sold)
Depreciation schedules and other capital asset records (keep for 3 years after the tax life of the asset)
Insurance policies (keep for the life of the policy)
Mortgages, deeds, leases (keep 6 years beyond the agreement)
Pay stubs (keep until reconciled with your W2)
Property records, improvement receipts (keep until property is sold)
Sales receipts (keep for the life of the product warranty)
Stock and bond records (keep for 6 years beyond selling)
Warranties and instructions (keep for the life of the product)
So now you know what you need to keep and toss, can you scan those receipts and will an electronic copy be acceptable? The answer is yes. The IRS has accepted scanned receipts since 1997. The rule is Rev. Proc. 97-22 and states that your scanned or electronic records must be as accurate as your paper records. The IRS also states that you must be able to index, store, preserve, retrieve and reproduce the records – in so many words, they require you to have your records organized and be able to produce them in hard copy format if needed. So before you start scanning receipts, make sure you have a system in place and you back up your electronic records especially if you shred and destroy any original files or receipts.
Available Resources:
IRS.gov – http://www.irs.gov/businesses/small/article/0%2C%2Cid=98513%2C00.html
IRS Publication 583 – Starting a Business and Keeping Records: http://www.irs.gov/publications/p583/index.html
IRS Bulletin Rev. Proc. 97-22 – http://www.irs.gov/pub/irs-irbs/irb97-13.pdf
* Most states with an income tax withholding requirement require employers to maintain employee records and have their own minimum retention period. Check with your state’s treasury department for their required retention period for employee related files.
The post Record Retention Guide for Small Business – What to Keep and What to Toss appeared first on Third Hand Bookkeeping Service.