IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Eric Moore of Accounting Solution Partners (www.asp-nw.com):
How Long Should an Entrepreneur Keep Business Records?
A Business Owner’s Guide to Retaining Tax Returns, Financial Records and Key Documents
The sheer volume of paper that accumulates in a business can be overwhelming. Taxes, employees, assets, cash and credit accounts, investments, and accounts payable and receivable all generate a paper trail that can bury daily operations if left unchecked. What should you keep? What can you shred? How long are you obligated to keep each type of document? Reference this guide for information on specific types of business records.
Tax record retention is a hot topic among business owners. They ask, “How long should I keep tax returns?” and are typically given a standard answer of three years. However, the “3-year rule” is really a misnomer because this general guideline is more of a suggestion than a rule. In fact, many situations can necessitate keeping tax records far longer. In some instances, tax documents must be retained for twice that length, while in others they should be kept indefinitely.
The 3-year rule is a function of the fact that the IRS has three years to audit a tax return and assess additional taxes. However, if the IRS suspects that a business has underreported income by greater than 25 percent, it can initiate an audit for up to six years after it has been filed, requiring that records be retained for the same timeframe. Furthermore, if a loss claim is filed for reduction of bad debt or worthless securities, the IRS suggests keeping records for seven years. For these reasons, it is logical to keep returns far longer than the standard three-year window. If a company’s specific tax situation put it at a higher risk for an audit due to added complexities, retaining tax records longer is always a shrewd decision.
However, it is important to note that the stopwatch on these suggested time frames only starts running after the return has been submitted. Therefore, if a return has not been filed, its corresponding records should be kept forever. This applies to fraud as well. If a fraudulent return has been filed, retain applicable records indefinitely.
Businesses should retain tax returns and their corresponding bills and payment records or receipts after they have been filed. Keep any documentation that supports reported income and claimed deductions or credits including:
- Business ledgers
- Bank statements
- Credit card statements
- Mileage logs
- Property sale records
- Brokerage statements
- Stock transaction records
- Retirement account records
The IRS will provide free copies of tax returns from the last three years and tax preparation software stores previous tax returns as well for easy access. Keep annual tax returns forever to prove that they were filed because if the IRS loses its copy of a return, they can assume it has not been filed. Proper historical records are as important proactively as they are reactively. Maintaining both paper and digital copies safeguards businesses in the case of an audit or error and aids in subsequent filings.
While the IRS advises that employment tax records be kept for four years, each state has separate laws governing their own tax returns. As a result, individual states may have different statutes of limitations regarding employment tax filings. States with longer audit windows may necessitate retaining employment tax records for as long as 12 years.
Previous Audit Documentation
A business is more likely to be audited again if it had a previous audit that went poorly. Subsequently, companies with audits in their history should proactively retain financial records past their minimum requirements.
Property records should be retained for as long as the property is owned and likely a time after as well. If the property is being depreciated or amortized, the records should be kept for three years after it has been written off to ensure that the proper schedules for depreciation and amortization have been followed. These records are essential for proving taxable gains or deductible losses, especially when selling the property.
Proof of insurance and insurance contract specifics should be kept indefinitely because employees may discover many years later that the materials they were exposed to on the job caused illness or injury. Protection in these instances requires that companies prove they were insured at the time of exposure.
Personnel files should be retained for one year after an employee is terminated to protect the company from an unlawful termination accusation. Payroll records, however, should be kept for three years after an employee leaves for any reason.
Permits & Licenses
Business permits and operating licenses must be retained for as long as the business is in operation. These should be kept with other essential ongoing business documents like current lease agreements for easy reference, should they need to be presented.
While it makes perfect sense to have a system, process and discipline to store and manage documents, we know how the demands of business (and life) get in the way. If you are no longer able to make sense of your records, and need help with a system to ensure compliance, please reach out to us!
If you have questions relating to the content of this article, Eric Moore of Accounting Solutions Partners would welcome the opportunity to answer them. Mr. Moore can be reached at (425) 492-1901 or firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.