How Long Should You Keep Business Records
How long should I keep my business records? It is quite a common question among business owners. The time of retention for different types of documents may largely differ depending on which event, action or expense a particular document reflects. According to the IRS, there are record retention standards for tax records. In general, these standards indicate that you should keep all documentation that contains income, deduction or credit information regarding your tax return until the end of the period of limitations for that tax return. You ought to always keep final copies of your income tax returns as well as any relevant correspondence with the IRS. It enables you to make correct computations if you file an amended return. Also, it will help you in preparing tax returns for the future periods.
The period of limitations is a time interval during which you can make changes in your tax return to ask for a credit or return. Also, during this period IRS may require additional taxes for your business. This interval is calculated in years from the tax return filing date. If your return was filed before the due date, it regards as filed on the due date.
Periods of Limitations for Tax Returns
1. If your business failed to report income, you must have reported, and it exceeds 25% of your gross income, you should keep records of the related documents for six years.
2. IRS requires your company to retain records indefinitely in cases when you failed to file a tax return.
3. If you filed a fraudulent return, you must also keep the records permanently.
4. If the described above situations do not apply to your company, you should retain your supporting records for three years.
5. If you filed a claim for a depraved debt deduction or a loss from valueless security, IRS recommends that you retain the corresponding records during the seven years period.
6. If your company files a claim for a credit or deduction, you must keep the relevant records for either three years from the date of the original tax return submission or 2 years from the date when the tax was paid, depending on which event happened later.
7. If your business has employees, the IRS recommendation is to keep employment tax records for four years after the date the taxes became due or were paid, whichever event happened later.
Among the data you retain there must be information about your identification number as an employer, the amount of wages, annuities and pension payments and their dates, tax deposits, as well as the names, addresses, and social security numbers of employees, their dates of employment, occupation, and other information regarding employment payments.
Business Asset Records
You must retain records relating to the business possessions pending the period of limitations perishes for the year in which you dispose of these assets. These records will help you calculate the applicable depreciation, amortization or deduction costs and also figure increase or decrease when you sell or dispose of the property in any other way.
In case of acquiring assets in a non-taxable exchange, your basis in this property will be equivalent the basis of the assets that you gave up, plus an increase by the amount of money you additionally paid. With such an exchange, you need to keep records of both old property and new property until the period of limitations expires within the year in which you dispose of the new assets.
Business Ledgers and Other Accounting Documents
According to the CPA recommendations, you are required to retain your profit and loss statements, journal entries, financial reports, check registers, and general ledgers on a permanent basis. In the same manner, basic business documents among which corporate by-laws and amendments, annual reports, Board of Directors information, and business formation documentation, should also be kept at your company indefinitely. Documents that are not related to tax records (such as account ledgers, invoices and expense reports, etc.) must be kept for at least seven years.
Human resources files
Your company can accumulate multiple employment files associated with current and former employees as well as applicants. Records for non-tax purposes must be retained for the entire duration of the employment term and additional seven years after an employee has left has been fired or laid off. Records concerning applicants who did not get the job should be kept for at least three years from the date of application.
If there have been accidents at your company as a result of which employees have been injured, you should keep such records for at least seven years after the case resolution or up to 10 years after compensation payments have been made.
If your company has been sued for discrimination, it is recommended that you keep these records for at least four years after the case had been closed.
Also, consider permanent retention of documentation related to the employees’ pension, benefits, and profit distribution plans.
Credit Cards and Bank Account Statements
If these are supporting records for the tax return, you should take into consideration the periods of limitations described in this article earlier. In other cases, the retention period is at least seven years. To reduce the number of documents you retain, you can keep detailed annual reports of your business with disposing of monthly statements after one year from the date of their creation.
When your records are no longer needed for the tax return, do not dispose of them until you make sure that you will not use them for other purposes. For example, you may want to store documents longer than it is recommended by the IRS to provide data to your insurance company or creditors. Before you discard your records, we recommend that you talk with your attorney or tax consultant.