4 Types of Tax Records Businesses Should Keep
In order for small businesses to stay on the right side of the Internal Revenue Service, documents related to tax returns and finances must be kept for a number of years. Thorough maintenance of these important records could mean the difference between thousands of dollars in tax debt or worse, jail time.
If the tax collector ever comes knocking, preparation is key. Meticulously kept financial and tax records that include these four types of documents is the best way to keep your business in good standing with the IRS.
1. Tax Returns
Most importantly, small business owners should keep their company’s tax returns for a minimum of three years. Should your return end up on a fraud investigator’s desk, though, the IRS could examine returns up to six years old. If the IRS can prove fraud, the agency has not statute of limitations and can audit back indefinitely. It may be in the best interest of business owners to keep “final business income returns and related correspondence” indefinitely, as they can assist in filing future returns. If your business claimed a loss due to worthless securities or bad debt reduction, tax records should be maintained for at least seven years.
2. Up-To-Date Business Asset Records
The equipment, vehicles, and real estate you use in your business are all considered by the IRS to be assets. These assets help you and the IRS determine depreciation, amortization, or depletion deductions, along with any losses or gains that came from the acquisition of the property. Accurate purchase, financing, and ownership records should be maintained as long as the asset is being depreciated or amortized. If the asset is sold, records would need to be maintained until the "period of limitations ends from the year you sold or otherwise disposed of that property."
3. Employment Tax Records
For businesses that employ one or more workers, employment tax records must be kept for at least four years after the date the taxes are due or paid, whichever is later. The personal data you used to maintain payroll, like social security numbers and addresses of your employees, is considered part of these tax records. All wages, tips, insurance, and pension payments must also be maintained for this period of time. It is important to remember that information is extremely sensitive, and should be kept with care.
4. Bank Statements and Financial Documents
Your company’s bank statements and portfolio reports should be retained for at least seven years. Essentially, any time your company is involved in a financial transaction, keep those records. Businesses should also keep receipts and invoices to document payments to and from vendors, suppliers, and customers. These records may need to be kept longer if they are considered “supporting documents” for tax purposes. To stay on the safe side, many experts suggest filing financial documents away for six to ten years. Some, like business ledgers and retirement plan records, should be kept permanently.
Regardless of whether your tax return has been meticulously prepared, your business should still keep track of these important documents. Electronic record keeping can help you cut the clutter inside your office while organizing records for easier access.
From the GPP CPA Blog