If you own a small business business, you need to keep business records, whether in digital or hard copies. The IRS recommends saving financial records for up to 7 years, although some documents should be saved longer than others. These are necessary for annual tax filings and potential audits.
What Are Business Records?
You know saving business documents is important. Now, you need to figure out what documents to save. The term “business documents” can refer to many things, including:
- Accounting records
- Legal documents
- Insurance documents
- Permits and licenses
- Bank statements.
A business record is any document that records a business dealing. It’s wise to keep company records on file for a while. You can review them or provided to authorities as needed.
Why Do You Need to Keep Business Records?
Small business owners sometimes forget to keep good records. However, bad record keeping can cause a lot of problems. Here are a few ways keeping business records can help you:
- Separate personal and professional expenses
- Check your business progress
- Prepare tax returns
- Project your tax liability
- Keep track of all deductible expenses
- Provide to authorities in case of an audit.
Personal and business purchases can get mixed up. This is more likely if you don’t keep good records. Receipts are important business records to keep. They can keep your personal and professional purchases separated. They can also help you see the source of your expenses.
Some records are for your information only. That doesn’t mean you shouldn’t keep them. Business and sales improvement documents can help you succeed. You don’t need to keep them by law, but it’s wise to hang onto them for a while so you can check your growth. You can also use the information to make improvements to your business.
You need the right records to file tax returns. If you report an expense or income on your taxes, you need to document it. In most cases, these are the same records you use to prepare regular financial statements. Keep them organized and somewhere easy to access.
Keeping good records is very important when you own a small business. Your records will help you project your tax liability. Once you do that, you can make estimated tax payments.
Want to benefit from allowable tax deductions? Then you need to keep track of your receipts. If you don’t, you’ll probably forget about some of your expenses. Then, you won’t be able to deduct them when you file your taxes.
The most important reason to keep detailed records is for audits. You never know when the Internal Revenue Service (IRS) might come. If they do, they’ll request documentation. Hopefully, this will never happen to you but if it does and you aren’t prepared, you could be in trouble. If you can’t support all the deductions you’ve claimed, you will lose them. You may even need to pay them back.
How Long Should You Keep Records?
The IRS recommends the following record retention schedule:
- Financial Records: Keep for three to six years. The IRS can request six years’ worth of financial records. They could show up at any time. You need to have the documents they ask for.
- Employment Tax Records: Keep for at least four years after the tax is paid or is due.
- Failure to File: If you fail to file a return, keep your financial records indefinitely.
Hopefully, the last situation won’t apply to you. Not filing taxes is illegal. It can cause your business to fail and you may even face criminal charges.
If you’re audited once, it can happen again. This is especially true if your first audit goes badly. That’s why you should always keep your business records. Stick to the IRS recommendation of six years. Keeping business records takes time and space, but the benefits are worth the sacrifices. Having peace of mind as a business owner is invaluable. It’s more important to be prepared than have extra filing space.
When you get rid of old documents, do it safely. You don’t want your information in the wrong hands. Shredding all paperwork is best. Tearing papers in half and throwing them away is not wise. Protecting your information should be your first concern. Being careless could put your business security at risk.
Business Records That Should Be Kept Indefinitely
Most records can be thrown away after a while. However, some should be kept as long as possible. These include active lease agreements, operation permits, and stock certificates. Hang onto these types of documents. You never know when you’ll need them. It’s wise to keep them separate from your other documents. That way you’ll know where they are at all times.
When it comes to record-keeping, it’s better to be safe than sorry. Worried about space? Purchase tall filing cabinets instead of short ones. That way you’ll make the best use of the vertical space in your office. Better yet, you can rely on digital records (backed up offsite).
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.