Nida Bohunr | August 20 2021
The basic rule of business management requires you to keep your financial statements ready at all times. It allows you to keep tabs on your expenses, especially if your tax are being audited or in situations where you are fighting a legal battle.
However, as the era of paperless transactions and cloud-based systems continues to blossom, companies and small businesses become uncertain about how long they should save their tax records and receipts. Record-keeping is a crucial task because any discrepancies can lead to you facing litigation or problems with the IRS.
Let’s get right to it!
It is recommended that you hold on to tax records and receipts for at least three years.
However, factors could change depending on the tax record of the type of action, expense, or event. Usually, it is wise to keep records of items that indicate income, deduction, or credit within your tax records until their period of limitations expires. The period of limitations of an item serves as the period by which you can amend your tax return to claim a credit, refund, or additional tax assessed by the IRS. (IRS, n.d.)
Most periods of limitations end within three years. After which, you do not need to keep tax returns for supporting documents.
Below are few cases of tax records with their predicted period of limitations:
1. Past tax returns: three years
2. Miscellaneous financial records: three years
3. Receipts: three years
4. Employment tax records: four years
5. If you have omitted records in your return, you should keep those records for at least six years.
6. If you deducted the cost of debt or worthless securities, you should keep records for seven years.
If you want to guarantee you’re off the hook, you should wait at least seven years. By that time, not only would the period of limitation be expired, but you would very likely not face any lawsuits or negatively impactful legal matters either. Plus, as stated earlier, if you omit taxes, even accidentally, you would be free of litigation or persecution from the IRS.
The following are some important tips for record-keeping, especially if you’re a small startup:
1. You should keep all supporting documents for at least three years.
2. Keep all receipts, invoices, bank statements, payroll records safe, and all other documentary supporting evidence for an item’s income, deduction, or credit as shown on your tax return.
3. Keep your information electronically backed up and wireless. Store everything off the paper and ensure that the documents are safe.
4. You don’t have to store the receipt when expenses are less than $75 or involve transportation, lodging, or meal expenses. However, you should still notify the IRS about when and where those expenses occur and what they were.
5. When you don’t need a document for your taxes anymore, you should remember that you could end up needing it for something else.
You should remember that the IRS would not rely on just your word. If you need solid evidence of your tax returns, you must provide documentation such as income, deductions, and credits, which you have reported on your tax return.
Therefore, the following are some of the main types of records you should keep:
Similarly, you should also keep any contracts, articles of incorporation, company-related documentation, business permits, and annual reports, even though you don’t need them to do your taxes.
You must understand that the IRS relays the burden of proof onto you. Resultantly, it’s up to you to back up every item on your tax return with documentation. The safest approach to record-keeping for small-scale businesses is to store as many records as you can.
Realistically, the IRS can’t possibly need every single transaction you’ve ever made. Receipts for small transactions get lost almost all the time. However, it is recommended to keep any receipts for expenses more than at least $75. (Zarzycki, 2019)
Also, though it may seem unnecessary, all business deductions for your tax return could be questioned during an audit; this includes expenses less than $75, money used for transportation, and lodging or meals.
For the IRS to accept a deduction under this amount, you should be able to present them with the expense amount, place and time of purchase, and the purpose of the expense.
Money spent on business meals, transport, and accommodation gets mixed up with the rest. For those taxes, you need to submit a detailed list of information such as all the people involved, when the transaction happened, etc.
You can refer to the official IRS guidelines to review what receipts are worth keeping.
According to the IRS, any record-keeping system works as long as it “clearly shows your income and expenses.” So, instead of keeping a sea of paper receipts, you can choose to go digital with your record keeping.
All digital copies are acceptable by the IRS as long as they are identical to their paper counterparts. Resultantly, if the IRS requests a paper copy, you should also be able to provide one.
Despite still needing paper copies as backup, creating a virtual version of your critical records would help avoid you accidentally misplacing them. You should be able to scan each document or receipt you get from your business, save it with a title, and then archive it forever. To help you with this, you can even get secure Cloud storage services from apps like Dropbox, Google Drive, and Evernote. These websites would enable you to scan, store, and then review your documents from anywhere. Similarly, you can get financial service providers or digital record-keeping apps for your business.
However, as a word of caution, you should note that you shouldn’t be too dependent on financial service providers like banks or credit card companies. Some online banking services don’t offer online record-keeping services, and they erase tax records within a month or a year.
Be sure to check the terms and conditions of each account and how long they store historical records. If it’s shorter than seven years, you would probably need to download those files to keep them safe.
Although, the beauty of digital copies is that they are also exceedingly easy to keep backed up and saved. You can keep double copies of all your secure documents in another location, such as a password-protected hard disk drive or another Cloud service app.
Additionally, if you want to store data online and reduce paper, you should ensure that your data is encrypted as well. Online tax storage providers do this. However, not all cloud-based systems are entirely encrypted.
Ensure that you back up your social security number and other personal information onto only encrypted networks.
Meanwhile, double-check before you toss out anything. You don’t need paper copies exclusively for taxes. Insurance claims or lawsuits would also require a record of past events.
The best way to store paper documents is at home in a safe or a file box. You can keep original copies of crucial documents in bank safety deposit boxes.
See Also: Filing Business Back Tax Returns In 2021 – A Complete Guide
No, if you use online banking services, you wouldn’t need a physical copy of your bank statements. Digital copies work just fine. However, to be safe, you should keep hard copies for at least three years.
A highly skilled accounting professional at Monily, having extensive and diverse experience of working in US healthcare and agriculture industry. Nida is a CA finalist with expertise in Bookkeeping, Auditing, Bank Liaison, Tax Preparation, Accounts Payable, Accounts Receivable.
