As a small business owner, you know that there are certain business records you are required to keep. The length of time they should be kept depends on the event, action, or expense that is being recorded. As a general rule, you must keep records that support an item of credit, deduction, or income on a tax return until the period of limitation for that tax return runs out.
The period of limitation is the amount of time you have to amend a tax return for the IRS to assess additional tax or you can claim a credit/refund. In this article, we’ll explain how long you should keep business records for your small business.
If your small business is located in Southeast Wisconsin, in Milwaukee, Waukesha, Muskego, West Allis, New Berlin, or Greenfield, contact Nolan Accounting to handle your financials. They specialize in tax prep, accounting and bookkeeping needs, and payroll services. Nolan Accounting can help you ensure that you maintain proper business records, as per IRS requirements.
What are Business Records?
In your business, you use business records to record/store information about your business. These may be physical copies or digital copies. There are two main classifications of business records: active and inactive.
Active Records
Active records must be readily available, as they are accessed on a regular basis. For example, employee timecards for the current pay period or policy/procedure manuals are active business records.
Inactive Records
Inactive records do not have to be readily available, as they are not accessed on a regular basis. For example, historical financial or legal records are considered to be inactive. You only need to access them when called on.
When stored, you should make sure to classify them based on their accessibility requirements. Make active records easy to access, but inactive records can be stored a little deeper.
Types of Business Records
There are several types of business records you will use within your small business. The most common are:
- Insurance documents
- Legal documents
- Accounting records (includes tax documents)
- Bank statements
- Permits/licenses
- Enterprise records
- Employee records
How Long to Keep Business Records
The amount of time you need to hold on to business records depends on the type of business you are operating. There are some common suggestions for how long you need to keep your business records.
Business Tax Returns
You need to keep your business tax returns and all associated receipts and documentation until the period of limitation has passed. This is typically 3 years after the return was filed. However, it may be up to 6 years if the IRS believes that there was a serious mistake made on your return.
Employee Files
Employee files should be kept for 7 years after the employee is no longer working for you- whether due to retirement, termination, or resignation. If the employee sustained an injury while at work or if they filed a lawsuit against the company for any reason, you’ll need to keep those records for 10 years.
Accounting Records
Accounting records should be kept for at least 7 years. Due to their nature, there are some financial experts that recommend these records be kept permanently.
Bank Statements
Bank statements and other operation records, including cash receipts, credit card statements, and cancelled checks need to be kept for at least 7 years if there are no other business or tax purposes.
Legal Documents
Legal documents, including your business formation records, property deeds, by-laws, ownership records, and any other legal documentation regarding your business needs to be kept on file permanently.
Insurance Documents/Permits
Other documents, including permits, licenses, and insurance documents need to be kept on file until they expire. You must store expired documents somewhere until you receive replacements with the new dates on them.
Conclusion
As a business owner, there are certain documents that you must keep on file. Some of them should be kept permanently, while others can be tossed out or archived after a certain period of time. You have active and inactive records. The active records must be kept accessible at all times, while the inactive records can be archived since they don’t need to be accessed as often.
If you are a small business owner in Southeast Wisconsin, contact Nolan Accounting to handle your financial needs. They can handle your daily accounting and bookkeeping needs, payroll, and tax prep. Nolan Accounting can ensure that your business records are kept properly at all times, as per IRS requirements.