April 15th (technically April 17th this year) has come and gone: your taxes are filed, the IRS has cashed your check, and you’re finally breathing that sigh of relief. Well, not so fast, as there are still looming questions about what to do with all those tax documents, not to mention all your other business documents, like payroll information, invoices, and business expense paperwork. Before going out to Office Depot to purchase that shiny, new filing cabinet because your existing one is overflowing, refer to this guide to small business record retention.
While there are exceptions to this rule, your safest bet is to make sure you have seven years worth of tax documents, whether you are a sole proprietorship or a small business with 50 employees. Although IRS audits generally only go back three years, if the tax man deems you didn’t report 25 percent of you income, you could be audited for the previous six years.
As a small business owner, it’s a good idea to keep careful records of receipts, income, and business expenses, including cancelled checks, charitable contribution receipts, credit card statements, and bank statement. If you are subject to an IRS audit, you’ll need a complete paper trail, in order to avoid paying extra penalties and taxes. Other areas besides tax documents that you should keep for seven years include accounts payable ledgers, accounts receivable ledgers, customer invoices, accident reports and claims, payroll records, purchase orders, and sales records.
Keep in mind, if you choose to only receive electronic income and expense records, many financial companies only keep your information to 12 months to two years — after which it is deleted. Make it a habit to download all of your business financial statements once per year.
There are other items that every small business should maintain permanently. Audit reports, trademark registrations, property records, end-of-year financial statements, deeds, mortgage, legal correspondence, insurance records, investment documents, and current contract and leases should be maintained permanently. Other items should be kept until the product is sold, warranty is up, or policy is no longer in effect.
When in doubt, it’s best to save the document or speak with your accountant or legal adviser for your specific small business record retention circumstances.