Deciding which business records to save and which ones can be tossed can be a tough decision. Here we offer guidelines on which records should be saved and for how long, as well as best practices to help streamline your recordkeeping efforts.
“Should I keep this file, or can I safely get rid of it?” It’s the perennial question of small business owners everywhere, especially in this era of tidying up.
Throughout the lifetime of your business, you’ll need to hold onto various records to track the health of your company, answer to the IRS and revisit agreements made with employees, customers, partners, vendors, landlords, banks and insurers. The IRS offers some guidelines on how long to keep some of these records, but they’re only a starting place.
To some degree, the industry in which you operate may dictate which records to keep and how long to keep them. The healthcare industry, for example, must abide by certain federal and state regulations for medical records.
No matter what your industry, the following best practices can help streamline your recordkeeping efforts:
Save most records at least seven years
The IRS advises small businesses to keep various financial and tax records for three to seven years, depending on record type. But many tax professionals recommend indefinitely keeping business tax returns and records. That’s because the statute of limitation on IRS audits can vary among investigations, says Candace Stevens, founder of Number Cruncher LLC, an accounting firm in Overton, Nevada.
Suppose, Stevens says, you file an accurate tax return every April and, as the IRS recommends for businesses that file accurate, timely returns, you purge your records every three years. The IRS can still audit you based on the mistaken belief that you under-reported your earnings seven years back. The time, cost and stress of re-assembling those records will far outweigh the inconvenience of saving the documents in the first place.
So which records should you save? “Any documents that show the income and expenses you used to prepare your tax return,” Stevens says. The following are among the most common small business records to save:
- Business and financial records, such as accounting records, contracts for work or sales, bank statements and significant cashed checks
- Gross receipts, such as invoices and 1099 forms
- Purchase receipts, such as those for inventory and raw materials
- Expense receipts, including those for travel, transportation, entertainment and customer gifts
- Employment tax records (if you’ve hired employees or contractors)
Keep some records indefinitely
Some documents should never be purged. For instance, you’ll need to hold onto any corporate records, permits, licenses and lease agreements, as well as any contract and tax records that contain original signatures, says Braden Perry, a regulatory and government investigations attorney with Kennyhertz Perry, LLC, based in Kansas City,
You also need to hold onto all receipts and documents proving ownership and the purchase price of significant physical assets. This includes any property, equipment and furniture your business buys. Same goes for stock certificates: keep them for the duration, even if you sell your shares, as you’ll still need those records for tax returns.
Keep important records handy for easy access
When you need to consult a critical document, you won’t have time to turn your office upside down digging for it. Save yourself the hassle by pulling crucial documents into one easily accessible file drawer or digital folder.
Perry recommends keeping all legal documentation at your fingertips, such as permits, licenses, rental leases and client and partner contracts. Also keep handy business insurance policies, payroll records and invoices you’ve submitted to clients. “These are the issues that come up most often and an organized system to locate them is key,” Perry says.
To that list, Stevens adds last year’s tax returns, including all records of receipts, as well as all forms and documentation you’re compiling for any tax returns you have yet to file.
Digitize all you can
Although it can take a bit of effort to set up, digitizing your records can save you time and headaches in the long run. Imagine getting rid of all those unwieldy stacks of paper and space-hogging file cabinets. Never again would you need to puzzle over a lost or faded receipt. Instead, all the documentation you need would be a mouse-click away.
Scanning your receipts is a good place to start, as thermal paper can fade quickly, often within a couple of years of being printed. Tax records and documentation are other good candidates for scanning, as these tend to take up a lot of space. Plus, it’s easier and cheaper to send documents needed for tax preparation to your accountant digitally vs. physically.
Back up digital records in at least two locations, automatically as you work if possible. External hard drives are a good bet if you don’t misplace them. Free to nominally priced cloud storage platforms like Dropbox, Google Drive and OneDrive offer a great alternative. As a bonus, you can use them to access your records from any machine.
Moving to digital recordkeeping software can further simplify the process. Besides liberating you from all that paper, small business applications can track and categorize expenses; create expense reports; and create, send and store invoices and contracts.
Once you set up and learn your way around an accounting tool like FreshBooks, Quicken or QuickBooks, they’re easy to use. Same goes for contract management tools like DocuSign. And many small business owners appreciate downloading their bank statements from their bank’s website to an Excel spreadsheet.
Establish a process
Perry advises creating a written record retention and destruction policy and schedule based on state and federal and regulations. He also suggests appointing someone on your team to oversee the process and update the policy as needed each year.
“The more organized you are, the more you can focus on the truly important issues and not scramble to find what is needed,” Perry says.
To keep up with the job, Stevens suggests scanning, shredding and otherwise tending to your records at least once a month. If you have a large number of receipts, you may need to scan them into your accounting application each week. Staying on top of this will give you better insight into your spending habits and cash flow patterns, she says.
When recordkeeping questions arise, turn to your accountant, attorney, banker or financial advisor for counsel. If still in doubt about whether to keep or toss a document, save it until an expert on your team or a regulatory body tells you otherwise.
This article is intended for informational purposes only. Readers should consult their own financial advisers, attorneys or other tax advisors regarding any financial or tax strategies mentioned in this article.
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