When it comes to recordkeeping, there are two key questions that business owners need to ask themselves: How long should I keep records? And why should I keep them? This blog post will answer those questions and provide some tips on what to do with your records once you’re done with them.
How long should I keep records?
The length of time you must retain a document is determined by the action, expenditure, or occurrence it documents. You must keep your records that are relevant to an item of income, deduction, or credit shown on your tax return until the statute of limitations for that tax return expires.
The period of limitations is the length of time during which you may change your tax return to claim a credit or refund, as well as the IRS’s opportunity to assess more taxes. The years given below are for income tax returns, unless otherwise stated. Returns that are filed late are regarded as submitted on the due date, even if they were filed prior
Keep a copy of all your filed tax returns. They may be helpful when it comes to preparing future tax returns and performing calculations if you file an amended return.
Why should you keep business records?
The IRS demands that you maintain documentation to support the income you received and the deductions you took. As a result, if you claim a deduction for a training course or a customer lunch, the IRS wants you to keep track of any information that may come in handy at a later time.
Aside from the IRS demanding that you maintain business records, there’s also a business case for doing so. Maintaining accurate financial records allows you to check your company’s progress at any time and verify whether it is profitable. Keeping track of your paperwork allows you to claim all legitimate expenses, which may help you save money by reducing how much tax you
Are there any documents I don’t need to keep?
It’s nearly impossible to remember everything. Receipts are occasionally misplaced, particularly for small expenditures. Can you still deduct expenses without receipts?
Maybe, if the expense is less than $75
On the whole, you can get away with not keeping a document for three reasons:
- The cost is less than $75. (Note: this does not apply to lodging expenses.)
- The cost is for transportation, and there’s no easy way to get a receipt.
- You’re using a per diem allowance under an accountable plan to report lodging and meal expenses.
Statute of limitations exceptions
The IRS requires you to keep your tax returns, supporting documents such as receipts, bank statements, 1099-MISC and anything else that supports your income and deductions for three years. There are a few exceptions to the three-year limit:
- The IRS has a lot of rules and filing requirements. Tax returns and supporting materials, such as receipts, are kept for three years.
Employment tax records
All employment tax documents should be kept for four years if you have employees. These include:
- Your Social Security number is not enough.
- This figure is equivalent to the amount of regular monthly, annual, and retirement payments received as a result of taxable earnings.
- This is a sum of any gratuities provided.
- Personal information, including names, addresses, Social Security numbers, and job titles
- W-2s that cannot be delivered to employees.
- Details of employment, including the dates employed and paid leaves, are listed.
- Allowances for employees’ income tax are recorded on the employee’s W-4 form (a withdrawal slip).
- The records of tax deposits made are shown.
- Copies of the tax returns have been sent.
How long should I keep records?
The length of time you must preserve a document is determined by the action, cost, or occurrence it records. You must keep your records that confirm an item of income, deduction, or credit on your tax return until the period of limitations for that tax return expires.
The period of limitations is the time frame in which you may add a credit or refund to your tax return, as well as the IRS’s opportunity to raise more money. The periods of limitation mentioned below are for income tax returns unless otherwise noted. The years referred to here are the years following the return’s filing date. Returns submitted before the due date
Keep copies of your filed tax returns on hand. They aid in the preparation of future tax returns and calculations if you file an amended return.
Generally speaking, for three years
The IRS recommends that you maintain your records for as long as necessary to substantiate your income or deductions on a tax return. In general, this means that you should retain your tax documents for three years after the date of filing or the deadline date (whichever is later).
Let’s say you submitted your 2020 tax return two months ahead of schedule, on February 10, 2021. You’ll need to keep the receipts, tax records, and any other documentation relating to the return until April 15, 2024 three years after your 2020 tax filing date.
Period of Limitations that apply to income tax returns
As you evaluate whether to keep or delete each document, the following questions should be posed.
If no situations apply to you, keep records for 3 years.
If you file a claim for credit or refund after you submit your return, keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
If you make a claim for a loss from worthless securities or bad debt deduction, keep documents for seven years.
If you do not disclose income that you should, keep records for six years if it is more than 25% of the gross income shown on your return.
If you don’t file a return, your records will be kept permanently.
If you submit a fraudulent return, the IRS can keep your records permanently.
Keep employment tax records for at least 4 years after the date the tax is due or paid, whichever comes first.
As you examine each document to decide whether to keep it or delete it, the questions below should be used.
Are the records connected to property?
Keep records related to your property until the year in which you sell or otherwise dispose of it expires. To compute any depreciation, amortization, or depletion deduction, as well as the gain or loss when you sell or otherwise dispose of the property, you must maintain these documents.
If you exchanged property without paying tax, your basis in the new property is the same as the old one, plus any money you paid. You must keep documentation on both properties until the year’s limitations period expires for the year in which you dispose of them.
What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, keep them until you discover whether you have to keep them longer for other reasons. For example, your insurance company or creditors may request that you retain certain documents beyond the IRS’s term.
What Records Should You Keep Permanently?
Keep permanent copies of your business formation documents, corporate by-laws, annual reports, shareholder meeting minutes, and other company documentation to assist explain your company’s operations and decisions to potential buyers, lenders, and others.
The Employer Identification Number (EIN) or Tax ID Number is similar to a social security number in that it cannot be transferred from one firm to another. You should keep it permanently even if you do not operate your company, since it may be required at any time.
If you have an “occurrence-based” insurance policy, you should keep it indefinitely. You are insured under an occurrence-based policy until the date the incident triggering the claim occurred. If you discover harm or other losses after terminating or changing your coverage, your coverage will continue to apply. (By contrast, a “claims made” insurance