While there are some who hold to the belief that you can’t have too much of a good thing, when good things come in the form of documentation — or chocolate, you better believe you can. Holding on to documentation longer than is necessary, whether it’s in the form of legal documents, financial documents, or employment records, can actually expose your business to unnecessary legal action.
How Long do Regulations Require Businesses to Retain Records?
The IRS is one entity all businesses keep records for. It happens to be the agency most businesses are primarily concerned with appeasing by maintaining records for extended periods of time.
According to the IRS, the general rule of thumb is that you must keep the records to support income and deductions at the time of tax filing until the period of limitation expires for that particular tax return. In other words, you must keep the documentation until a point in which the IRS can no longer come back and seek clarification, ask for proof of income, or require further evidence of deductions.
Unfortunately, the IRS makes it clear that this period of time varies according to the action, expense, or event of record. The IRS website provides additional information on the subject.
Keep in mind though, that tax purposes aren’t the only reason to keep records around. Before you get rid of records that are no longer necessary for tax purposes, make sure there is no other reason you should be keeping them around instead.
Records your business may need to retain include:
- Business documents establishing your right to do business in your city or state
- Financial records (accounts payable, accounts receivable, payroll records, tax filings, etc.)
- Business agreements (contracts, employee benefits package information and enrollments, etc.)
- Regulatory compliance documentation
- Insurance papers
When Should Businesses Get Rid of Records?
While it may be counter-intuitive at this point to do so, there are times when businesses must turn their thoughts to getting rid of records and documentation that are no longer required.
Records that sit around unattended and unused have a tendency to become massive liability issues for businesses in the event that some disaster occurs. But when should you hold on to records and when should you maintain them?
It’s time for businesses to get rid of documents when they are no longer required by statutes or regulations by the local, state, or federal government to keep them, when there are no business transactions or decisions requiring the information they contain, there is no litigation requiring you to keep them around for the duration of a specific legal action — or no potential legal exposure for keeping them around.
What About Disaster Situations?
Despite your best efforts to adopt outstanding record keeping and maintenance practices for your business, there are times when disaster strikes and records are damaged or lost as a result. The IRS offers a helpful video on reconstructing records after a disaster. Unfortunately, it’s a time-consuming and, often, expensive process.
This is why valuable papers insurance is so vital for businesses today. All businesses have documents they need to safeguard. This vital insurance provides an added layer of protection when disaster strikes.