Guidelines to Record Retention for the Small Business

Although the IRS doesn't expect you to keep everything forever, they do expect you to have your supporting documents if they happen to come knocking on your door. Consequently, many small businesses turn into pack rats to avoid the dilemma of being audited with no paper trail. One reason to retain good records that support tax returns from a few years ago is because you are not sure of the statute of limitations on inquiries made by the IRS. Moreover, you don't know how well your business is doing or how it can be optimized with out reports and documentation.

Generally, the IRS can audit tax returns that are up to three years old, therefore you should definitely hold on to your information for at least the last three years. If you have not reported some of your income and the unreported portion represents more than 25% of your total income the IRS has up to six years to investigate. However if you have not filed a claim or you filed a fraudulent return there is no time limit on when the IRS can demand that you present supporting paperwork. In general, the longer you keep you paperwork, the better off you are. With advancements in technology, saving or storing documentation is easier than ever. Now that you know how long they should be kept, take a look at exactly what types of documents you should keep.

Keep Business Operations and Financial Statements

Bank statements, profit and loss statements (income statement), balance sheets, should be kept in a neat file and labeled for easy access. Normally, your tax accountant or CPA will do this for you but you should have copies of these reports yourself. It also helps if you arrange them in chronological order. It is also best to keep soft and hard copies of things just in case.

Hold on to Receipts and Invoices

• Purchases: Canceled checks, credit card sales slips, cash register tape receipts and invoices should all be retained. This is documentation of things you purchase to resell to customers. These documents provide the necessary proof that you have indeed spent the amount you claim to have spent on categories that you may have included for  or exemptions. The IRS may want to take a look at these to ensure that everything is in order.
  

• Gross Receipts: This is the documentation that shows income your business has received. This includes cash register tapes, bank deposit slips, receipt books, credit card charge slips/statements, invoices, 1099-Misc Forms, and more.
  
  
• Expenses: This is documentation other than purchases of products you pay for in order to operate your business. This could include such things as (if you need to travel), transportation receipts, canceled checks, invoices, account statements, and cash register tapes. If you purchase equipment, machinery, or furniture, make sure you keep these receipts and how you have depreciate them. Make sure you have docs that support what you paid, when, and why and how you used the asset.

Employee Payroll Information

Employee contact information, number of employees, employee payroll tax and salary information should be retained as well.

Contracts and Other Legal Documentation

Articles of Organization, Doing Business As Papers, IRS EIN confirmations, operation agreements, loan documents, permits, vendor contracts, leases, and more should all be organized and retained for easy access.

Besides the fear of an audit, maintaining good business records will allow you to strategize ways to optimize the business and increase profits. It will show you what products or services are doing better than others, what expenses can be avoided or lessened and so on.