Management
Record Retention for Small, Closely Held Businesses
Patricia Murphy
Determining how long to keep documents is a combination of judgment and state and federal limitations. Document retention in small businesses might not be as challenging as it is in large corporations, but the small-business owner has a bigger role in keeping track of records and ensuring that they are both retained correctly and properly maintained.
Determining how long to keep business and financial records can quickly become complex and confusing. However, business-record retention is important for several reasons, including potential tax audits, litigation, future sale of business, and succession planning. Establishing and following a record-retention schedule will go a long way toward ensuring that your company keeps the vital records it will need. Here are some things to keep in mind.
Tax Records
Although actual tax returns should be kept permanently (including cancelled checks from tax payments), the supporting documentation from previous years should be kept until the chance of an audit passes.
The IRS generally has three years to examine your return. This limit can increase to six years if the agency believes you under-reported income by more than 25%. No limit exists if you failed to file or filed a fraudulent return. As such, it is wise to keep tax records for at least seven years after a return is filed.
Special attention should be paid to records connected to assets (i.e. residences, real estate, stock purchases, etc). Keep records relating to property until the period of limitations mentioned above expires for the year in which you dispose of the property itself. You must keep these records to figure any depreciation, amortization, or depletion deductions and to figure the gain or loss when you sell or dispose of the property.
Generally, if you have received property in a nontaxable exchange, your basis in that property is the same as the basis in the property you have given up, increased by any money you have paid. You must keep the records on the old property, as well as the new property, until the period of limitations expires for the year in which you dispose of the new property.
Accounting Systems
Audit reports and financial statements from accountants, trial balances, general ledgers, journal entries, cash books, charts of accounts, check registers, subsidiary ledgers, and investment sales and purchases should be kept permanently. Other records, such as payable and receivable ledgers, bank reconciliations, bank statements, and cash and charge slips, should be retained for seven years.
For certain assets (residences, real estate, stocks, etc.), all statements, invoices, and purchase documents that substantiate cost should be kept, typically for seven years after the asset is sold. Depreciation schedules and asset-inventory records should be kept permanently.
Corporate Records
Small businesses that have a corporate structure also need to retain certain corporate records. All information for annual reports, articles of incorporation, stock ownership and transfers, bylaws, capital-stock certificates, dividend registers, cancelled dividend checks, and business licenses and permits should be kept permanently.
Employee Records
Small businesses that employ individuals other than the owner or partners should keep each employee’s records for the duration of employment. These records can then be disposed of beginning seven years after the date of termination. Payroll records should be kept for the following periods.
Permanently:
• W-2 forms;
• Payroll tax returns; and
• Retirement plan agreements.
10 Years:
• Workers’ compensation benefits;
• Employee-withholding-exemption certificates; and
• Payroll records.
Seven Years:
• Payroll checks;
• Time reports;
• Attendance records;
• Medical benefits; and
• Commission reports.
Three Years:
• Contractor information upon completion of contract; and
• Tip substantiation.
Insurance
Copies of all current insurance policies should be maintained in separate files and kept for 10 years after the policies expire.
Legal
Documents such as bills of sale, permits, licenses, contracts, deeds and titles, mortgages, and stock and bond records should be kept permanently, while canceled leases and notes receivable can be kept for 10 years after cancellation.
Storage of Documents
To save time and space, consider an electronic storage system to file your data. The IRS has accepted electronic supporting documentation for several years. All requirements that apply to hard-copy books and records also apply to electronic storage systems that maintain tax books and records. The electronic storage system must index, store, preserve, retrieve, and reproduce the electronically stored books and records in a legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS.
With the threat of identity theft, it is also good practice to shred all of the records you no longer need, especially those with personal information. Shredders are an inexpensive means of destroying small amounts of information. However, a personal shredding service should be considered with a large volume of shredding.
The suggested retention periods shown above are not offered as a final authority, but as a guide to determine your needs. If you have any unusual circumstances or wish to delve further into record-retention rules and regulations for a specific industry, you should consult with your CPA, attorney, or other industry professional. This is especially important if you plan on destroying any important legal, business, or financial paperwork.
Patricia Murphy is a senior associate at the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3540; [email protected]
