Keeping proper records for the right amount of time is confusing for many small businesses. Some wind up not holding onto financial records long enough. Others hold onto every scrap of paper that looks like it might be important someday, and they keep holding it like a security blanket. Few things need to be kept forever. What’s important is to keep things organized and to hold on to the receipts, statements, and documents that are the most important.
Staying Organized
Beyond deciding what to keep and how long to keep it for, there is the issue of how to keep everything organized. One big drawer or box labeled “Important” is not going to be sufficient. Have set categories for files. Popular categories include
- Operating Expenses
- Invoices
- Clients
- Payroll
Depending on the nature of your business, there may be different or additional categories to consider. A good bookkeeping service in Atlanta will be able to talk to you about the nature of your business and help you organize your records so you have a strong sense of what is going on with your business and so that you are ready for tax time or any business changes you decide to make.
In addition to categories, files can be labeled according to the year of origin as well as an “expiration date” which will let you know when it is okay to shred the record and make room for transactions of the future.
Deciding What Financial Records to Keep
Tax Stuff
The decision of what to keep and for how long depends on a lot of different factors. IRS requirements are near the top of every business’s priority list, because the possibility of an audit always exists to some extent, and you want to be prepared. Tax records are anything that shows evidence of income or supports your qualification for a credit or deduction on your return.
Income related documents include
- W2s and 1099s
- Invoices
- Credit Card Charge Slips
- Cash Register Tapes
Some things that support tax deductions are
- Mileage logs
- Canceled Checks
- Receipts for purchases
- Receipts for charitable contributions
- Credit card slips and statements
- Invoices
In most cases, tax records are kept 3 years from the filing deadline or the time the taxes were actually filed and paid. This time frame is standard because it reflects the period of limitations. It is during this time when tax returns can be amended and the IRS can assess additional taxes.
The three year rule does have some exceptions. Records that show evidence of a bad debt deduction or a financial loss from a worthless security should be kept for 7 years. Tax records that reflect unreported income that is at least a quarter of your gross income need to be retained for six years. Employment tax records should be kept for at least 4 years after the date they are paid or the due date, whichever is later. Some recommend that filed State and Federal Returns remain in your files for as long as 6 years.
Property Records
The ownership of property has tax implications, of course, but it is also something that is looked at a bit differently that other types of tax records. As long as you own the property, you should keep any deeds or titles that show that. If you sell the property, you will need to report the sale on your next tax return. Physical as well as intellectual property both count. After that return is filed, keep those records another 4 years. Because the value of property can fluctuate, keeping the records will assure that you have what you need to calculate what type of gains or losses you incurred with the sale.
Insurance and Credit Records
The need to hold onto insurance records or credit records such as loan agreements can depend on the companies you are working with. Some want you to hold onto records longer than the IRS. Make sure you check with these companies before you decide to discard anything. If you have an active policy or open credit account, you’ll want to keep the original agreements as well as recent statements.
Things You Can Discard
In addition to shredding documents that are old enough to be considered expired, there are also even more temporary documents that can be discarded even sooner. ATM receipts and deposit slips are things some people keep just to make sure that they are being properly credited for their transactions. Usually, there is a more official record of these transactions within a few days on your bank statements. Once you see this, the actual receipts and deposit slips can be shredded and recycled.
In most cases, it is not necessary to keep each and every bank statement. Transactions on a monthly statement will carry over to a quarterly or year end statement. Keep whichever statements carry the most information, and shred anything remaining. Actually tossing some things will help you keep your records clean and organized and make life easier for you, your bookkeeper, or accountant.