Many questions arise when it comes to record keeping so we’ll cover some basic guidelines that should help you better understand when to keep it and when to trash it.
Keeping records far past the necessary time-frame can cost unnecessary time and money, and in some cases can expose your business to litigation. However, understanding which records are helpful and keeping those in an organized fashion can help you monitor the progress of your business, from growth, to the most popular services/products, to seeing issues you may need to fix.
First Steps Towards Organized Records
Records Required by Law
- Business documents: eg. articles of incorporation, by-laws, permits
- Business agreements: obligations to clients, suppliers, vendors, and staff (eg. benefit packages)
- Business executive decisions: including meeting minutes and actions, health and safety docs, annual reports, dividend records, anything stating how decisions were made and commitments kept.
- Records saying regulation requirements have been met.
- Financial records: accounts payable and receivable, payroll, tax filings.
Prepare Financial Statements
Financial statements become a necessity when dealing with your bank or creditors. Being able to prepare accurate statements means you need to have good record keeping habits. To start, prepare these:
- Income statement: shows income and expenses of the business for a period of time.
- Balance sheet: shows assets, liabilities, and your equity in the business on a particular date.
Within the records, keep track of the sources of all receipts received so you can separate business from nonbusiness and taxable income from nontaxable.
Deductions
Fight the laziness and keep track of every deduction throughout your fiscal year, otherwise they may be forgotten!
Tax Return Preparation
Make sure your records support the income, expenses, and credits you report – all these statements will probably be the same as what you prepare for your financial statements.
When Records Can Be Tossed
Aside from the records required by law to keep, it’s good to decide as a business how long other records should be kept to ensure the business runs efficiently, without getting rid of things too soon. So decide on a timeline for removing any records dealing with transactions or decisions that are completed, anything with expired statutes or regulation timelines, and make sure you keep anything involving a litigation as long as needed to ensure you’re not accused of selective disposition.
Records for a Federal Audit
The statute of limitations for an IRS audit expires after three years, under normal circumstances. In unusual circumstances, say if a business or individual under-reports income by 25%, they can go back six years, and even seven years if a loss was claimed. In the cases where a business hasn’t filed their taxes, there is no statute of limitations, so the advice in this case is keep everything forever!
Records for a State Audit
Statutes of limitations vary by state, so it’s best to check with your state’s laws before throwing files away (some states can go back farther than the IRS).
If you have any questions about record retention guidelines, bookkeeping, or preparation of financial statements, don’t hesitate to contact the tax and accounting professionals at D&M Accounting and we will be happy to help!
Review this guide written by the IRS for additional advice on record keeping, especially helpful for new and small business owners. It covers everything, from what you need to know as a new business owner about taxes and the forms you need, deductions, choosing a business structure, getting your TIN, determining your accounting method, employment tax details, and much more.
