How long should I keep business documents?
For business owners, keeping thorough records helps you to monitor the progress of your business, prepare your financial statements, keep track of deductible expenses, identify the source of your receipts, prepare your tax returns and support items reported on your tax returns.
Keeping good records also protects you in the event of a potential tax or legal problem.
At RotenbergMeril, we are often asked how long specific records should be kept. Simply put, files should be kept for as long as they serve a useful purpose, or until all legal and regulatory requirements have been met.
But what does that mean exactly?
It is best to keep files based on the length of the statute of limitations for breach of contract, breach of fiduciary duty and professional liability claims. For some documents, this means that they should be kept permanently and for others, this can be anywhere from one to six years.
Keep in mind that the statute of limitations can vary in each state, county and local government. Also note that many specific industries may require different retention periods as well. In order to safeguard yourself and protect your business, you should check with your local courthouse, city clerk office and the IRS for more information.
A good rule of thumb is to add one year to the statute of limitations period for retaining files related to breach of contract, breach of fiduciary duty and personal liability claims.
For tax records, the statute of limitations refers to the period of time when you and the IRS can make changes to your tax returns. The periods for change by you and the IRS are:
- Three years if you filed on time, or with extensions, and did not file a fraudulent return and did not understate your income by 25 percent or more
- Three years after filing or two years after the tax was paid if you filed an amended return or other change to your original return, such as a refund or quick claim
- Six years if you filed on time or with extensions, but understated your income by more than 25 percent
- Seven years if you filed a claim for a loss from worthless securities or a bad-debt deduction
- Forever if you filed a fraudulent return
- Forever if you did not file a return
For taxpayers, this means keeping most of their income tax records for a minimum of four years. However, it may be necessary to retain them for up to eight years or even permanently.
When it comes to your tax returns, you have the responsibility to prove entries, deductions and statements. This is known as the burden of proof and you must have the proper documentation to be able to prove certain elements of expenses in order to deduct them.
For things such as travel expenses, keep separate records for the cost of travel, lodging and meals and make sure you can provide documents for the dates you left and returned, as well as the number of days spent on business. For transportation costs, you must keep record of each separate expense. With a car, this means keep records of the cost of the car, any improvements made, the date you starting using it for business, the mileage for each business use and the total miles per year.
A great way to organize all important records and simplify your records retention is by implementing the five-drawer method. In order to do this, you must report your income as well as file and pay your taxes on time or with extensions to limit your audit exposure to three years from the date you filed your return.
First, separate and store all permanent files in their own drawer, as they cannot be a part of the five-drawer method. Then organize your drawers as such:
- Drawer 1: Current year tax return information
- Drawer 2: Previous year’s tax return
- Drawer 3: Two years ago
- Drawer 4: Three years ago
- Drawer 5: Four years ago
At the beginning of each year, shred the contents of drawer five and move the contents in each drawer down one. Please note that if you have employees, you must keep all employment tax records for at least four years after the date the tax becomes due or is paid. If this is the case, use a six-drawer method and toss the sixth drawer once the four-year statute of limitations expires.
With all the confusion surrounding which documents to keep and appropriate timeframes for keeping them, we sought to compile a document retention guide to provide you with the insight you need for smart filing. At RotenbergMeril, we understand the burden of being without the documents you need when making a change to your tax return or in the event of an IRS audit.
Please note that this guide is only to serve as a recommendation and these guidelines are not intended to represent legal advice.
Some of the documents you should keep permanently include:
- Auditors’ reports
- Contracts and leases in effect
- Important and all legal correspondence
- Minute books of directors, stockholders, bylaws and charter
- Mortgages, deeds, bills of sale and note agreements
- Property appraisals by outside appraisers
- Property records including costs, depreciation reserves, year-end trial balances, depreciation schedules, blueprints and plans
- Training manuals
- Trademark registrations and copyrights
Some of the documents you should keep for 7 years include:
- Bank debt deduction
- Bank deposit slips, reconciliations, and statements
- Cancelled checks
- Cancelled stocks and bonds certificates
- Expired contracts and leases
- Invoices (sales and cash register receipts, merchandise purchases)
- Invoices (vendors and customers)
- General ledger
- Payroll journal
- Subsidiary ledgers (accounts receivable, accounts payable, etc.)
- Time cards
- Worthless securities
To download a printable tip sheet with a guide for how long to keep a number of business documents, visit www.rotenbergmeril.com/documentguide.
With three offices in the NY/NJ Metropolitan area, RotenbergMeril can help you with all of your audit, accounting, taxation, business valuation and litigation support needs. Contact us in New Jersey at (201) 487-8383, in New York at (212) 660-0050 or visit our website: www.rotenbergmeril.com.