What Tax Documents Should You Keep?

And which ones should you shred?

If your filing cabinet is bursting at the seams, you’re not alone. As a small business owner, you have a lot of paperwork to keep track of – everything from business licenses, employee records, lunch receipts – the list goes on.

Some of the more challenging records to manage are your business’ tax documents and all of their supporting paperwork. Navigating tax document requirements is complicated and is often unchartered territory for a small business.

As a default, many business owners end up unnecessarily saving every last receipt for years and years. Or, they become overwhelmed and throw away important information.

Properly storing tax documents comes down to these four keys to success.

  • Know how long to store your tax documents
  • Understand which ones to store
  • Understand which ones are safe to shred
  • Devise a plan to do things right

How long should you hold onto tax documents?

The IRS can audit your return for up to seven years after you file if they suspect tax filings were made inaccurately or if you claimed a deduction you didn’t deserve. The period of limitations – the period of time you have to amend your tax return – expires three years after a return is filed. So, hang onto your tax returns and all supporting documents for at least seven years.

Which must stay and which can go?

Tax rules pertaining to financial records seem to change every year. The guide below will help you better understand the latest requirements and break down which documents you should store, which you can shred, and which belong under lock and key.

Store paper copies of these six documents.

The following documents are those you’ll want to keep literal tabs on – print, file and store these six tax documents every year.

  1. Form 1040
    Small businesses should store 1040 forms and any other supporting documentation for a minimum of three years.
  2. Schedule K-1
    Small businesses that file as an S-Corp or Partnership need to hold onto schedule K-1 documentation for a minimum of six years to show evidence of partnership shares.
  3. Employee Records
    Store your employee records, payroll reports and other similar employee record documentation for a minimum of seven years to be safe.
  4. Partnership Agreements
    It’s critical to maintain all partnership or LLC partnership agreements, and any amendments to those agreements, in hard copy for life of the partnership.
  1. S-Corp Acceptance Letters and Form 2552
    Maintain a copy of both letters and forms indefinitely if you have an S-Corp.
  2. Required Licenses
    Maintain hard copies of all state and local licenses that are required for you to operate your business.

Store these electronically. 

Not every business record requires you to maintain a physical paper trail. If you’re like many businesses and prefer to maintain your records and documentation electronically, you can keep these documents on a server or on the cloud.

  1. Transaction Statements
    Bank or credit card statements or other similar transaction statements are your back-up documentation to most, if not all, of your payables. Paper or electronic transaction statements should be filed and stored for at least three years after the filing of the transaction’s tax season.
  2. Legal Agreements
    Contracts or legally-binding documents should be stored for the life of the contact, and for years after in the event that those documents need to be revisited.
  3. Federal and State Tax Filings
    Maintain your electronic records for a minimum of three years – more if your business owns property, has employees, or has any inaccurate filings from the past.

If you do decide to store these documents electronically, it’s critical to the safety of your business that you protect your information with trusted, proven data security. A recent SCORE Webinar, ‘What Small Businesses Need to Know About Cybersecurity,’ touches on the back-up and recovery of sensitive documents.

Whatever electronic or cloud-based storage option you choose, it’s worth your time to research that platform’s data security and their process for safeguarding your business, as well as recovering your data should there be a security breach. Check out this list of business cloud storage providers to help you determine the safest way for your business to store sensitive information electronically and keep your tax documents and other business records in order.

These you can shred. 

There are several types of business records that do not need to be physically or electronically stored. In fact, some records containing personal information are many times better shredded than not. This excludes any tax documentation, legal documents, and most of the records listed above.

Always check with your financial advisor and accountant before you begin to shred what may be important documentation for your business to maintain. Typically, though, most businesses can shred non-essential documentation that lists personal information.

If you’re still not sure whether to keep those business records or store them away, even after the period of limitations has expired, hanging onto them for a while longer is never a bad option. And, digitizing your records will make it even easier to store past documents, taking the stress off of your filing cabinet.

Create a system to keep things organized.

Now that you’ve organized your business’ financial records and know which documents to store as physical copies, which ones can be stored electronically and which ones can be shredded, the next step is to come up with a system for filing and storing the right documentation. 

If you have a question about your business records, reach out to a SCORE mentor today!

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