Tax Recordkeeping

Tax record retentionDo you have boxes full of old tax records?  You’re probably thinking of trashing those old records come spring cleaning time. 

Storage takes up space and costs money, so the question of how long and what type of records to keep is vexing to many small business owners.

After all, if the IRS hasn’t audited you yet, how likely is it that they will come after you now?

What Tax Records Should You Keep?

As a basic rule, keep all records that document:

  • Business income
  • Business deductions
  • Cash receipts
  • Cash disbursements
  • Asset purchases & leases
  • Building or tenant improvements
  • Tax payments
  • Business Travel
  • Credit card transactions and receipts
  • General Ledger transactions
  • Financial Statements

Documentation can be kept in original form or scanned and saved electronically.

As the cost of cloud storage can be very low these days, it may be time to consider scanning records instead physically storing them.

Cloud storage also protects them from damage or loss.

How Long Do You Need to Keep the Tax Records?

The answer to that depends on the type of item involved. Many accountants recommend using a 6 year rule of thumb for tax return related items to protect you in the event the IRS audits you for under-reporting your income.

As a general rule:

  • Keep copies of all your filed tax returns indefinitely.
  • Keep all employment tax records for at least 4 years.
  • Keep tax documentation for a minimum of 3 years, provided you have reported all income and filed all required tax returns.

However, if you have not filed a return or you filed a fraudulent return, keep your records indefinitely. If you under-reported your income by 25% or more, keep your records for at least 6 years.

When Does the Time Clock Start?

The “period of limitations” refers to the time in which you can amend a tax return or that the IRS can assess additional tax. The IRS uses the date you filed your tax return or amended tax return, not the due date.

The exceptions to this rule are:

  • If you pay your taxes after the filing date, the IRS uses the date of final tax payment.
  • If you file before the tax due date, the IRS uses the due date.

So, if your tax return is due on March 15th, but you receive an extension and don’t file it until August 1st, start counting on August 1st. If you file an amended return, count from the date the amended tax return is filed.

Assets and Retirement Accounts

Some records should be kept for a longer period of time.

If any of your tax records are directly connected to assets (equities, real estate, etc.), then you should keep them until you dispose of the property and the period of limitations has passed for the taxation of any gain or write-off of any loss.

To document capital gains or losses, you will need to be able to show your purchase costs and any capital investments you made.

Retirement plan account statements should be kept to prove the tax status of your withdrawals.

IRS Recordkeeping Information

The IRS has additional information on their website with more specifics. If you are in doubt about what to save or discard, consult the IRS publication or your tax accountant for guidance.

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