All business owners would like to get rid of old records and free up space. However, before you fire up the heavy duty shredder, there are a few federal tax law rules you should know. Please be sure to read the whole article before you make a final determination of what to throw out.
Three-year paper records
Generally, for paper records listed below, you should hold these records for three years from the later of the date of filing a return or the due date of the return.
• Daily sales records
• Cancelled checks (for other business reasons, you might wish to hold longer)
• Bank deposit slips
• Auto mileage logs (but keep for the life of the vehicle, if longer)
• Paid vendor invoices
• Expense reports
• Entertainment expense records
Caution: Some state statutes exceed the federal statute by up to one year. So, if you want to be safe, consider at least a four-year holding period.
Unfortunately, there are records that you just should never get rid of, such as:
• Annual financial statements
• Tax returns and documents determining an income tax liability
• General ledgers and journals (including end-of-year final balances)
• Copy C of Form W-2
• Corporate stock records (including minute books and chartered bylaws)
• Real estate records
Special rules for corporate records
The IRS has special rules that require holding onto business records maintained on a computerized system. If your business has less than $10,000,000 in assets but you maintain items listed above on your computer, follow the paper record rules above. But if your business has more than $10,000,000 in assets, the IRS requires that your computer records be in a retrievable format. You must keep documentation for these data files, such as:
• System and program flowcharts
• Records formats
• Source program listings for programs used to create the files retained
• Label descriptions
• Detailed charts of accounts
• Evidence that the retained records reconcile to the taxpayers’ books and the tax return
• Evidence that periodic tests are performed on the retained records
Other things to consider
Please note that we are only considering IRS rules for record retention, and these recommendations are for the minimum period for retaining business records. In certain circumstances, such as potential litigation, you might consider a longer period. This tax alert should be considered only as a guide, and special circumstances can always apply. A good rule of thumb is that if you are not sure; seek a professional’s advice before you throw business records away.
Please contact us for further information. My Business Partner.us and 480-503-8904 or April@MyBusinessPartner.us