Which Financial Records Should Your Small Business Keep (And for How Long?)
When you run a small business, you need to become a collector of sorts. Specifically, you should be collecting a host of financial records, from tax documents to receipts to invoices and more.
This isn’t just for posterity’s sake. You should keep financial records around because you might need them. Old financial records can help you resolve disputes, are useful if you’re undergoing an IRS audit, and can even help you with forward-looking projections.
However, while you want to hold on to many of your financial records, you don’t want to become a pack rat either. Many financial records only need to be retained for a certain amount of time — after that, they simply won’t have any use.
Today, we’ll discuss what types of financial records you need to hang on to, and how long you should keep them around before they lose their utility.
Tax Records
Let’s start with perhaps the most sensitive and consequential of financial records: your tax documents.
There’s no singular guidance for all tax records. How long you should keep them varies by type and generally lines up with how much time the IRS has to audit you for each situation.
For instance:
- General tax records: The IRS suggests that you keep tax records for three years. If you file a claim for a credit or refund after you file your return, the guidance becomes the later of three years after filing the return or two years after paying the tax.
- Employment tax records: Keep these for the later of four years after the tax was due or four years after the tax was paid.
- Claims for a loss from worthless securities or bad debt reduction: Keep these files for seven years.
- Additional guidance: If you fail to report income that you should have, and it’s more than 25% of your gross income that year, keep your records for six years. If you don’t file a return, you should keep your records indefinitely. (But you should always file a return for as long as you’re in business.)
Financial Records
Documents, such bank and credit account statements, should be kept for a minimum of seven years, though in some cases, your accountant might suggest holding them for longer. Depending on your situation, you might be able to dispose of monthly statements after one year and simply retain annual statements.
Financial Reports
Regularly prepared financial and operational reports should be kept for at least five years, though it’s certainly OK to keep them longer. Forecasting documents (such as budgets), however, can be kept for up to three years; past that, they likely won’t provide any useful insights.
Contracts and Agreements
Contracts and agreements with clients, suppliers and other business partners outline the terms and conditions of your business relationships. These can include service agreements, partnership agreements and lease contracts.
In general, it’s best to keep these contracts for four to five years after they expire. That said, if the contract becomes the subject of a dispute, keep the contract for four to five years after the resolution of the dispute.
Invoices
Invoices, which detail the transactions between your business and its customers or clients, should be kept for between three and seven years, depending on the situation. You can refer to the tax records section above — the guidance there largely applies to the guidance for invoices.
Ownership Records
Ownership records include things such as formation documents, deeds and shareholder meeting minutes. These should be kept indefinitely.
Employee Files
In general, you should keep an employee’s personal records for at least seven years after they leave the company. However, if the employee files a claim against your business, hold on to those records (and any additional documentation) for at least a decade after the claim is resolved.
This doesn’t include job application files. Keep job apps, including those for prospective employees you ultimately didn’t hire, for at least three years.
Property Records
The IRS is very clear about the retention of property records. It explicitly states you should keep them “until the period of limitations expires for the year in which you dispose of the property.” These documents help you calculate depreciation, amortization or depletion deductions, as well as determine the gain or loss upon the property’s sale or disposal.
Reduce Your Record-Keeping Burden in a Flash
In many cases, the documents you keep will be physical in nature. But increasingly, companies are able to go paperless and digitize many of these records. While this makes it far easier to store documents, digitization comes with its own set of challenges and security concerns.
McManamon & Co.’s paperless office consulting services can help you navigation a transition to a more digital-first way of running your business, including storing and organizing documents. We can also show you how going paperless will help you reduce costs over time and improve your workplace’s technological flexibility.
If you want to learn more or get started right away, call us at 440.892.8900 or contact us online.
Tags: accounting, audit, McManamon, paperless office, record-keeping, small business, small business accounting, small business finances, small business taxes, taxes | Posted in accounting, audits, McManamon & Co., paperless office, small business, Small business finances