What records should your business keep, and how long should you keep them? There are several categories to consider when record keeping for businesses, some for internal purposes and some for tax returns and other government requirements. Let’s take a look at these by category.
- Tax records. First, consider the records you need to substantiate your annual income tax return. The IRS says that you must maintain adequate records, so support the items of income and expense that you claim. That means you must be able to produce receipts, invoices, cancelled checks, or banking records supporting expense items. Similarly, you should keep sales slips, invoices, or bank records to support income items.
- Accounting records. Most businesses have adequate accounting systems to capture routine transactions, but not for nonroutine transactions such as the purchase of depreciable assets. When you buy a car, computer, or piece of office equipment, be sure to file all purchase documents, assign an inventory number, and immediately set up a depreciation schedule.
- IRS audits. Generally, the IRS can audit a tax return for three years after the date it was due or the date the tax was paid, whichever is later. However, if there is a major understatement of income, they can audit for six years after the due date (or seven years after the tax year). For that reason, you should keep most income tax records for seven years. In our office, we have routinely needed to submit tax returns for even farther back years to support certain tax positions. As such, we recommend that you keep all of your tax returns and records.
- Sales and Use Tax. State taxing authorities are focusing their audit activities by targeting small businesses sales and use tax. Keep invoices and reports showing your sales tax amounts and tie them to your sales and use tax filings. More importantly, keep records showing all your purchases and sales/use tax reporting. Include details behind any corporate credit card payments to defend the payment of sales and use taxes.
- Corporate records.Every incorporated business needs good corporate records, including documents associated with forming the company, bylaws, business licenses, and minutes of all board meetings. Shareholder records should include stock registers and records of all share issuances and redemptions. Also keep copies of all contracts and leases. Finally, don’t forget current and terminated employee files, and records of employee pension or profit sharing plans. Most corporate and employee pension plan records should be kept indefinitely.
- Computer recordkeeping. The IRS has established a series of rules and recommendations concerning how electronic records must be maintained. Generally, such records should contain the same information as paper records and should be kept for the same length of time.
Retention Guide when Record Keeping for Businesses
In business, good record keeping is essential not only for tax reporting purposes but also for the success of the company. Generally, you need to retain records for three years after the filing due date or when you actually filed your tax return, whichever is later. Remember to add six months to this requirement for most state audit time limits. If an error is found that exceeds 25% or more of your obligation, the time limit can be expanded to six years. The guidelines below give retention periods for the most common business records, in a worst case audit scenario. Please call if you’d like assistance with your record retention program.
| Accounting Records | Retention Period |
| Accounts payable | 7 years |
| Accounts receivable | 7 years |
| Audit reports | Permanent |
| Chart of accounts | Permanent |
| Depreciation schedules | Life of assets plus 7 years |
| Expense records | 7 years |
| Financial statements (annual) | Permanent |
| Fixed asset purchases | Permanent |
| General ledger | Life of business plus 7 years |
| Inventory records | 7 years(Permanent for LIFO system) |
| Loan payment schedules | 7 years |
| Purchase orders (1 copy) | 7 years |
| Sales records | 7 years |
| Sales records | 7 years |
| Tax returns | Permanent |
| Bank Records | Retention Period |
| Bank reconciliations | 2 years |
| Bank statements | 7 years |
| Cancelled or substitute checks | 7 years(Permanent for real estate purchases) |
| Electronic payment records | 7 years |
| Corporate Records | Retention Period |
| Board minutes | Life of company plus 7 years |
| Bylaws | Permanent |
| Contracts – major | Permanent |
| Contracts – minor | Life + 4 years |
| Insurance policies | Life + 3 years(Check with your agent. Liability for prior years can vary.) |
| Leases/mortgages | Permanent |
| Patents/trademarks | Permanent |
| Shareholder records | Permanent |
| Stock registers | Permanent |
| Stock transactions | Permanent |
| Employee Records | Retention Period |
| Benefit plans | Permanent |
| Employee files (ex-employees) | 7 years (Or statute of limitations for employee lawsuits) |
| Employment applications | 3 years |
| Employment taxes | 7 years |
| Payroll records | 7 years |
| Pension/profit sharing plans | Permanent |
| Real Property Records | Retention Period |
| Construction records | Permanent |
| Leasehold improvements | Permanent |
| Lease payment records | Life + 4 years |
| Real estate purchases | Ownership period plus 7 years |
