If you own or manage a small business, you know that storing paperwork and paper files can become overwhelming. After a while, you run out of places to store receipts, records, tax records, and other paper documents. You might wonder whether this is all really necessary. Good small business record keeping is useful if you apply for a business loan, are audited, or are looking to acquire another business. In addition, the IRS requires small businesses to maintain certain records with their returns for a number of years. So, what do you keep and what do you throw away? We’ll outline what records you need to keep and how long you need to keep them.
How Long Do You Need to Keep Documents?
Different types of documents have different requirements. A few, like your business license and tax ID papers, you need to keep indefinitely, but most paperwork can be discarded after a certain time.
Records You Need to Keep for 7 Years
- Records relating to writing off bad (uncollectible) debt and investment products that have become worthless
Records You Need to Keep for 6 Years
- Records verifying income that you omitted from your tax return
This one is a little tricky. If you made a mistake and failed to report income when you should have reported it, you need to keep records about that income for six years after the date that you filed your amended tax return or the due date of the tax return.
Records You Need to Keep for 4 Years
- Employment tax records
Records You Need to Keep for 3 Years (from the time you file your tax return)
- Past tax returns
- Receipts and other documents to support your tax return calculations and deductions
- Miscellaneous business records, such as P&Ls, monthly expense reports, and monthly and annual income reports
Tax documents that you’ll want to keep include anything that supports your deductions and other items on your tax return. This includes receipts, bank deposit or direct deposit records, invoices, canceled checks or bank statements, credit card receipts, accounts payable and receivable reports, W2 and 1099 forms, and payroll receipts.
Records that You Aren’t Required to Keep by Law but Are Still a Good Idea
It’s a good idea to keep the following records for the life of your business, or until another document supersedes it.
- Contracts (documents that you’ve signed with clients, vendors, contractors, or employees that are still valid)
- Articles of incorporation for your business
- Your business permits
- Company health, safety, and any other regulatory documents
- Annual reports for your business
Paperwork that You Don’t Have to Keep
The IRS allows you to deduct business meals, lodging expenses, and transportation expenses that are less than $75 without a receipt. However, and this is a major point, you do need to tell the IRS when the expense took place, where it took place and what it was for. For meals, it’s a good idea to also jot down who ate with you and the business purpose of the meal.
You also don’t have to keep paper statements if you have bank statements, brokerage statements, or other financial statements that are available online.
What Documents Can You Throw Away?
You can toss anything on our list above that’s older than the three to seven years required. We think that’s a good mid-April project, to purge your files of old paperwork after you file your tax returns to make room for the new year’s files. In addition, you can toss out any contract, insurance plan documents, and employee handbooks that are no longer valid or have been replaced by other documents.
Tips for Good Small Business Record Keeping
How can you streamline your paperwork and filing systems, so that you have access to everything you need without having your office overrun by filing cabinets? We have a few suggestions.
1. Be Diligent about Annual Purging
Whether you throw (or delete) files in April or another month, be consistent about getting rid of other paperwork as soon as you can. Purging one year’s files is manageable; deleting an entire decade’s worth of receipts, reports, and returns can be overwhelming.
2. Consider Moving Files to the Cloud
Electronic files are safe, secure, and accessible from any (authorized) electronic device. What’s more, they are much less bulky than paper files. The IRS is very accommodating when it comes to your record-keeping systems. They say you can use any method as long as the record “clearly shows your income and expenses”. Digital statements are acceptable to the IRS if they are identical to the written copy.
To move your documents to the cloud, sign up for an account with a cloud storage company like Dropbox, Google Drive, or Evernote. Next, invest in a good scanner and start scanning your receipts, returns, and other documents into a cloud file. Like paper records, you’ll want to organize them by time period and category, so that they will be easy to retrieve when or if you need them.
3. Backup Your Documents in at Least One Other Location
Even though you have your documents stored in the cloud, it’s smart to have them stored in at least one other location. That might be on a thumb drive or another cloud server. For electronic statements, the bank or brokerage’s website is good enough to use as a second location.
To learn more about streamlining your small business record-keeping storage systems, while still having access to all the documentation you need for tax, loan, and other financial purposes, contact Eco-Tax. We’ve been helping small business owners like you with their tax and accounting needs since 2002.