Banking and Financial Services Sections

Know How Long to Hang on to All That Paperwork

Record Retention 101

By Patricia Murphy

Patricia Murphy

Patricia Murphy

All entities produce a variety of records. Maintaining these records is more than a matter of filing away a few important documents. A well-thought-out record-retention plan can benefit your company operationally, protect against litigation, and help ensure compliance with state and federal laws and regulations.

Over the past decade, the amount of electronic information has grown exponentially, and organizations are producing far more content than ever before. A significant amount of electronic data is produced and shared through various forms of unstructured data (e-mails, texts, social media). The ability to easily share information, while efficient, puts multiple copies of important documents in multiple locations. Many organizations don’t have systems in place to deal with this unstructured data, yet are liable for this content.

An effective records-management program will provide employees with the knowledge and tools needed to ensure paper and electronic files are properly managed. Establishing and following a record-retention schedule will go a long way to ensure your company keeps the vital records it needs (and doesn’t).

Tax Records

Although the actual tax returns should be kept permanently (including the 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, though the limit increases to six years if the agency believes you underreported income by more than 25%. No limit exists if you failed to file or filed a fraudulent return.

Special attention should be given to records connected to assets (i.e. residences, real estate, equipment, stock, etc.), which need to be kept longer. The tax consequences of a transaction this year, such as a sale of property, may depend upon events that happened years ago. Keep records relating to the property until the above period of limitations expires for the year in which you dispose of the property.

For example, to determine tax consequences of the sale of real estate, you must know your basis (the original cost plus later capital improvements). If you received property in a non-taxable exchange (like-kind exchange), your basis in the new property is the same as the basis of the property you gave up, increased by any additional money paid to acquire the new property.

You must keep the records on the old property, as well as on the new property. If stock is sold, you would need to maintain records of your basis of the stock, which includes your initial investment plus any reinvested dividends.

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, typically you want to keep all of the statements, invoices, and purchase documents that substantiate cost for six 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 register, cancelled dividend checks, and business licenses and permits should be retained permanently.

Employee Records

Small businesses that employ individuals other than the owner or partners should keep the employee records while the person is still employed with the company. The personnel files can then be disposed of after seven years, beginning after the date of termination. Payroll records should be kept as follows:

• W-2 forms, payroll-tax returns, and retirement-plan agreements — permanently;

• Worker’s compensation benefits, employee withholding exemption certificates, payroll records (after termination) — 10 years;

• Payroll checks, time reports, attendance records, medical/dental benefits, commission reports, accident reports — seven years;

• Employee benefit plans — six years; and

• Contractor information upon completion of contract, and tip substantiation — three years.

Insurance

Occurrence-based policies (which cover claims reported years after the policy expires, as long as the event occurred during the policy period) are essentially active forever and should be kept indefinitely. Property policies/claims-made policies (which cover claims reported only within the policy period) should be kept for six years. Workers’ compensation policies should be kept indefinitely, as claims could take years to develop. Life-insurance policies should be kept permanently.

Legal

Documents such as bills of sales, 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.

Document imaging (scanning) allows technology to convert paper documents to electronic images. Document imaging can provide major benefits, including reducing storage space, reducing paper purchased, improved employee productivity, and quick overall access to information.

With the threat of identity theft, it is a good practice to shred all the records you no longer need, especially those with personal information. Shredders are inexpensive in 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 which to compare your needs. If you have any questions or unusual circumstances, or wish to delve more into industry-specific practices, be sure to consult your CPA, attorney, or other industry professional before destroying any important legal, business, or financial paperwork.

If you have questions regarding electronic files, consider speaking with an IT professional in addition to those resources listed above.

Patricia Murphy is a senior associate at the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3540; [email protected]

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