Once that tax return is submitted to the IRS, it’s tempting to forget about all your paperwork and move on to the next year. Why would you need that hotel receipt from two years ago if you haven’t been audited?
Strong financial recordkeeping not only helps you better run your business, it’s also legally required. Below, we answer your questions about managing tax records for your small business.
What do I need to keep?
The IRS requires small businesses to keep records documenting any income, deduction or credit on your tax return. This includes:
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Receipts
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Invoices
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Payroll records
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W2 and 1099 forms
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Accounts payable and receivable
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Bank statements
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Credit card receipts
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Cash register tape
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Cash slips
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Canceled checks or proof of electronic funds transferred
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Tax filings and previous tax returns
Anything I can skip?
Any expenses smaller than $75 shouldn’t need the original receipt, but you do need to track when and where the purchase was made and its purpose. This does not apply to lodging expenses; all lodging expenses should be saved. If transportation costs more than $75 but you were unable to get a receipt (e.g. the taxi didn’t have a printer), you should be safe as long as the expense is documented.
For how long do I need to keep records?
Most supporting documents should be kept for at least three years. The IRS sets its Period of Limitations at three years, meaning you have three years to amend your tax return and they have three years to audit your return. The three years begins at tax return due date, not the day you filed. If you filed your 2018 return in March 2019, you would need to keep records until April 15, 2022. There is no statute of limitations on fraudulent or unfiled returns.
There are exceptions to the three year rule that require keeping records for longer:
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Employment tax records need to be kept for at least four years
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If you failed to report income on your return, keep records for at least six years
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If you claimed a deduction for bad debt or securities, keep records at least seven years
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Property records may need to kept longer than three years depending on sale and profit timelines
That sounds like a lot of paper. Where am I supposed to keep all this?
The IRS doesn’t expect you to have a warehouse full of neatly filed receipts. Digital copies are acceptable as long as they are identical to the original. You can digitize and electronically store records in a system that works best for you, as long as you are able to clearly locate and track your business’ income and expenses. Create a workflow at your company for carefully digitizing, uploading and tagging any documents in a secure cloud-based system.
It’s been more than three years. Can I chuck my documents now?
The beauty of a cloud-based system is that you can more easily keep records for longer. Still, if you don’t want tons of files taking up space (and likely costing you storage money), you can create a retention schedule for when to review certain kinds of documents. With any paper documents, either once they’ve been digitized or once they’re no longer needed, send them to a secure shredder to protect sensitive information about your business and your employees.
If you have more questions about which tax records you need to keep for your small business, contact our team of tax preparation professionals at Patin and Associates today.
