Space for paper records is expensive, as is the cost of maintaining the equipment to retrieve information from old electronic records. When you consider all the financial statements and other paperwork you need to store for at least some period of time (balance sheets, income statements, statements of cash flows, and tax returns as well as detailed documents that support them), it can be overwhelming. So how long do you really have to carry this burden?
As early as possible, set up a record retention policy with the help of your attorney and accountant. They can tailor the basic principles to your situation. Many record retention periods are tied to tax filings, but you also need other records on hand for insurance claims, employee benefits, and litigation. Not having required records when necessary can be costly, so it pays to know before you throw.
The first rule of record retention is simple: Keep all financial records for at least four years past their date. The Internal Revenue Service can audit a return up to three years after you file the initial return or any amendments, whichever is later. Many business owners use the rule of seven, choosing to retain these records for seven years. If holding on to your financial statements longer will give you peace of mind, the rule of seven is a good option for you.
Some Things Are Forever
You should keep some important reports, statements, and other paperwork indefinitely. These include the following:
- Auditor’s reports
- Proof of capital contributions, including cash deposits; transfers of equipment; loans; and shares issued and redeemed
- Retirement and profit-sharing plan records, including audits, actuarial reports, employee and employer contributions, investment activity, IRS rulings, and so on
- Documents and proof of costs related to creating intangibles such as copyrights, patents, and trademarks
Other types of financial records you need to retain include the following:
- Investments: Hold records of securities purchases for four years after the final sale of all shares or units. If you write off an investment as worthless, the IRS requires you to keep records for seven years after taking a claim for the loss.
- Real property and equipment: Separate records of long-lived assets from other tax records because you need them for as long as you own and use this property. These records will help you deal with insurance following a disaster or prove a loss or gain following a sale or other disposition such as charitable donations.
- Human resources: Personnel records fall under a variety of laws, with retention requirements ranging from one to six years from the end of employment. The rule of thumb is to keep all these records for six years after termination to ensure nothing is inadvertently destroyed too soon. In addition, results of medical exams involving toxic substances or biopathogens must be maintained for 30 years. Civil rights laws require maintaining records of job applicants for two years.
Storing and Destroying
Secure storage, onsite or offsite, is an essential part of your records retention policy. Protection from fire and other disasters is only one consideration. As you upgrade technologies, transfer your electronic records to newer storage media so you spare the time, expense, and uncertainty of maintaining critical records on outdated technology.
Adhering to your retention policy will control the amount of material in storage and avoid problems in litigation. When it’s time to destroy records, protect your interests by using a secure form of destruction that shreds or burns documents and permanently erases electronic media. If you use a third party for destruction services, check that it is bonded and provides sworn statements attesting to the destruction.
Maria Markham Thompson is a certified public accountant with 25 years of financial services industry experience.