Good business recordkeeping lets you prepare financial statements helps you keep tabs on your expenses, and comes in handy if you ever get sued or audited. But did you know that the IRS also requires you to keep financial records for your business?. Many businesses are not sure how long records must be saved in the paperless era. Understanding how long should you keep business records will help you avoid IRS problems.

The General Rule

Keep business income tax returns and supporting documents for at least seven years from the tax year of the return. The IRS can audit your return and you can amend your return to claim additional credits for a period that varies from three to seven years from the date you first filed. (These time frames are known as “periods of limitations.”) But it’s a good idea to use seven years as your guide for keeping these documents. Outside the tax arena, there's remarkably little guidance about how long you should keep business paperwork.

The records and documents that businesses should have if they need to address most situations include...

Tax Returns

Your business tax returns and all supporting records must be kept until the IRS can no longer audit your return. The IRS can audit you until three years after filing. The time period can extend to six years if the IRS suspects you had an error on your return. taht is why most lawyers, accountants, and bookkeeping service recommend seven years.Payroll tax records: The IRS suggests retaining employment tax records for a minimum of four years after the tax becomes due or has been paid, whichever is later.

Employment tax records include...

• Employees’ names, addresses, social security numbers, dates of employment, and occupation

• Wages, annuities, and pensions paid to employees with dates of payment taxes withheld including FICA and Medicare

• Records of tips and fringe benefits paid if applicable to your business

• 1099 documents for independent contractors.

Current Employee Files

Data such as employees' personal records, performance appraisals, employment contracts, etc. should be held on to for 6 years after they have left. If an employee suffers a work-related accident or files a claim against the business, it is advisable to retain those records for up to 10 years after the claim is resolved.

Job Applicant Information

All applications must be kept for at least three years, even if you did not hire the applicant.Ownership records: These records should be kept permanently and include the formation documents, the meeting minutes, the by-laws, the property deeds, and the stock ledger if that applies. Your EIN or Tax ID Number is like a social security number. It can never be assigned to another business, and you should retain it permanently, even if you no longer operate your business.

Accounting Services Records

Accountants are usually very conservative and often commend that you keep financial statements, check register, profit and loss statements, budgets, general ledgers, cash books, and audit reports permanently.

What Other Documents Should You Keep?

You might also have leases for your business premises, insurance policies, and business loan records, among other documents. Leases and insurance policies can be used to help your negotiating position when it comes time to renew, and you will want to keep them until they are replaced. Operational records including bank account statements, credit card statements, canceled checks, cash receipts, and checkbook stubs should follow the seven-year rule.

We hope this has helped clear up the problem of how long to keep business records. Your CPA, outsourced accounting service, or tax attorney may recommend a different approach based on the rules of your industry and the specific needs of your business but these are the general rules.

As a small or medium-sized business owner, your time is valuable, and you need to be choosing carefully where to focus your energies. With a good outsouced accouting firm handling your books, you can focus on the core tasks of your business.

Contact us (859-344-6456) for a consultation!

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James E. Wilson, CPA is a team of professionals provide innovative financial solutions designed for today’s business owner. Our advisors treat each client relationship with the loyalty and care required to properly advise you now and well into the future.

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