What documents do small business owners need to keep for their tax records?
Before getting rid of any business documents, you should develop a strategy to determine the types of business records that you need to keep and how you will store them. Business owners may retain copies of all tax documents and correspondence that are sent to the IRS or state tax authorities. Additionally, all documents that support gross receipts can be kept. These include deposit information, bank statements, 1099 forms that are received by the business, invoices, purchase orders, receipts books, and cash register tapes.
You may also keep documents that support your business purchases, such as canceled checks, receipts, invoices, loan documents, credit card statements, and bank account statements. If you are claiming business miles or automotive expenses, you might keep a travel log showing the date, mileage, and business purpose for your trip. For meals and entertainment expenses, you can keep a log showing who was present for the meal and entertainment expenses and what the business purpose of the meeting was. For assets, you may keep depreciation information, Section 179 documents, and other purchase documentation that supports the depreciation claimed.
Businesses should also consider retaining their employment tax records. That includes W-4 forms, W-2 forms, 940 forms, 941 forms, Employment Contracts, and other employment related documents. If your business pays sales taxes, you should keep documentation related to the amount of sales subject to sales tax, the amount of sales tax collected, and the amount and dates of sales tax remittances. Finally, you should retain your accounting documentation. That includes your general ledger, Profit and Loss Statement and Balance Sheet. If you need assistance with preparing these accounting documents, our tax professionals are here to quickly assist you.
How long should business records be kept?
The amount of time that you should retain business records varies depending on the type of document. It is generally recommended that you keep tax records for at least seven years. Although the IRS states that certain types of tax documents can be retained for less time, the safest choice is to retain all tax documents and supporting documents for at least seven years. Once you do dispose of your physical tax documents, it is prudent to keep digital copies of your business tax records indefinitely. Electronic copies of your bank statements may be kept for at least seven years also, although retaining digital copies indefinitely would be prudent. Accounting documents, such as your general ledger, Profit and Loss Statement, and Balance Sheet can be retained indefinitely.
The EEOC requires certain employment records be retained for at least one year from the date of the employee’s termination. Payroll records must generally be retained for at least three years. You may want to speak with an employment attorney before destroying any employment documents. Even if you are going to destroy the physical documents, you may want to retain digital copies of the employment records for at least seven years. Storing digital copies of your employment records indefinitely is usually the best option.
Contracts and other legal agreements can typically be retained indefinitely. If you must get rid of some contracts or other legal agreements, you should first consult with an attorney to ensure that disposing of those documents is proper. If your business has corporate governance documents, such as Bylaws, an Operating Agreement, Corporate Minutes, or written consents, you should consider retaining those documents indefinitely.
What documents can small business owners send to the shredder?
Although many documents should be retained, there are some documents that you can send to the shredder. Before shredding anything, it is best to speak with your tax preparer or tax attorney first. Additionally, because storing digital documents is easy and does not take up any physical space, you might consider making digital copies of documents before destroying the physical document.
Some of the documents that you can get rid of are estimates, bids, insurance policy records not needed to prove business expenses, health insurance forms that are not needed to prove business expenses, market research, sales forecast documents, financials prepared and used for internal purposes, confidential letters, and marketing and advertising documentation.
Some documents that you may not need to retain for tax purposes, may still need to be retained for other reasons. You should speak with a business or employment attorney before shredding documents that are not needed for tax purposes, especially business or employment documents.
How can a business owner organize and store tax documents?
Organizing and storing your tax documents starts with understanding what documents are needed to prepare and support the entries on your tax return. If you are operating a startup business, our Tax 101 Guide for Startups is a great resource for learning some of the fundamentals of business tax returns. When developing a strategy for document retention, consider speaking with a tax professional to determine what documents need to be retained and the best system for retaining those documents.
One way to retain documents without using a lot of physical space is to store your documents digitally. By eliminating as many paper documents as possible, you are better able to organize your physical documents while also retaining digital copies of all of your necessary records. When storing digital copies of documents, consider storing the digital files in at least two places. Having a physical hard drive that is not connected to the internet and backing up all of the documents in the cloud is a great way to store your digital documents to ensure that you will always have a copy of the digital files accessible.
You may want to store paper documents in a lockable, fireproof file cabinet. You may also consider off-site storage. Off-site storage allows you to free up office space and reduce storage costs, while also protecting your paper documents. Even if you retain your paper documents in a safe manner, you should still consider having digital copies of all documents. This will ensure that you always have copies of your documents available.
Knowing how best to handle business tax documents can save you time and space, and give you peace of mind. If you have questions about business documentation, reach out to a Rocket Lawyer network attorney. If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Don’t do your taxes™ - Let us do them for you.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.