Most business owners know they should hold onto important documents related to their company’s finances. But have you ever wondered what documents you really need to keep and when it’s finally okay to throw them away?
The truth is, it really depends. It depends on the specific document and what you use it for. The IRS says that you should keep documents “that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.” That means that any document that backs up the information you’ve included on your tax return should be kept through the “period of limitations” set by the IRS.
What’s the “period of limitations”?
The period of limitations is the timeframe you or the IRS can revisit a tax return you’ve filed. If you find that you left something beneficial off your taxes, you’re allowed to amend your return and claim a credit, as long as you do so within the period of limitations and have the proper documentation.
However, during this time, the IRS can also take a deeper look at your return and charge you for taxes you previously failed to pay. If you believe your return is correct, having the right records will prove you’re right. The IRS provides specific periods of limitations for different scenarios on their website.
Employment tax recordkeeping
You should keep records related to employment taxes for at least four years after your last quarter filing. Employment tax records should be comprehensive and include specific details about each employee, like their name, social security number, dates of employment and the wages and benefits they were paid. You should also hold onto copies of past returns you’ve filed and the tax documents your employees completed when they were hired.
Records concerning property
If your business owns any property or equipment, you should keep all relevant documents related to it until the period of limitation passes for the year you sell or dispose of the property. This is because your records support any depreciation, amortization or depletion deduction or the gain or loss you incur when selling the property. Again, the IRS website can help you determine the correct period of limitations for your situation.
Records that aren’t used for taxes
Even if records aren’t used for tax purposes, there still might be good reasons to hold onto them. For instance, an insurance company might request certain documents while preparing a policy quote for you. Also, your current lenders might want particular records to understand how their investment is doing and potential lenders could make a similar request before deciding to invest.
Use online document storage
Keeping documents stored and organized has long been a hassle for business owners. Paper tends to pile up and can quickly make your desk a cluttered mess. And some documents get lost, damaged or accidentally thrown away before they even make it into the pile. You can use a filing cabinet but even that takes up space and requires time to organize and later search through.
The good news is you can now store all your documents online in the cloud. Most services offer a variety of convenient ways to upload your records and it’s easy to find the document you need when the time comes.
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