If your filing cabinet is bursting at the seams, you’re not alone. As a small business owner, you have a lot of paperwork to keep track of – everything from business licenses, employee records, corporate lunch receipts – the list goes on.
Some of the more challenging records to manage are your business’ tax documents and all of the supporting paperwork that comes with them.
Navigating tax document requirements is notoriously complicated and is often unchartered territory for a small business.
As a default, many business owners end up unnecessarily saving every last receipt for years and years. Or, even worse, they become overwhelmed and throw away important information.
Properly Storing Your Tax Documents Comes Down to These Four Keys to Success
- Know how long to store your tax documents
- Understand which documents to store
- Understand which documents are safe to shred
- Devise a plan to keep it all organized
How Long Should a Small Business Hold onto Tax Documents?
The IRS can audit your return for up to seven years after you file if they suspect tax filings were made inaccurately or if you claimed a deduction on a bad debt. The period of limitations – the period of time you have to amend your tax return – expires three years after a return is filed. So, hang onto your tax returns and all supporting documents for at least seven years, if not longer.
For the full breakdown of federal tax documentation requirements based on your unique business needs, go to the IRS website and read through their page on how long to keep tax records.
So, Which Tax Documents and Business Records Should Stay, and Which Can Go?
Tax rules pertaining to financial records seem to change every year. The guide below will help you better understand the latest requirements and break down which documents you should store, which you can shred, and which belong under lock and key.
Store Paper Copies of These Six Tax Documents
The following documents are those you’ll want to keep literal tabs on – print, file, and store these six tax documents every year.
- Form 1040
Small businesses should store 1040 forms and any other supporting documentation for a minimum of three years.
- Schedule K-1
Small businesses that file as an S-Corp or Partnership need to hold onto schedule K-1 documentation for a minimum of six years to show evidence of partnership shares.
- Employee Records
Store your employee records, payroll reports, and other similar employee record documentation for a minimum of seven years to be safe.
- Partnership Agreements
It’s critical to maintain all partnership or LLC partnership agreements, and any amendments to those agreements, in hard copy for life of the partnership.
- S-Corp Acceptance Letters and Form 2552
Maintain a copy of both letters and forms indefinitely.
- Required Licenses
Maintain hard copies of all state and local licenses that are required for you to operate your business.
Three Types of Tax Documents to Store Electronically
Not every business record requires you to maintain a physical paper trail. If you’re like many businesses and prefer to maintain your records and documentation electronically, you can keep these documents on a server or on the cloud.
- Transaction Statements
Bank or credit card statements or other similar transaction statements are your back-up documentation to most, if not all, of your payables. Paper or electronic transaction statements should be filed and stored for at least three years after the filing of the transaction’s tax season.
- Legal Agreements
Contracts or legally-binding documents should be stored for the life of the contact, and for years after in the event that those documents need to be revisited.
- Federal and State Tax Filings
Maintain your electronic records for a minimum of three years – more if your business owns property, has employees, or has any inaccurate filings from the past.
If you do decide to store these documents electronically, it’s critical to the safety of your business that you protect your information with trusted, proven data security. A recent SCORE Webinar, ‘What Small Businesses Need to Know About Cybersecurity,’ touches on the back-up and recovery of sensitive documents.
Whatever electronic or cloud-based storage option you choose, it’s worth your time to research that platform’s data security and their process for safeguarding your business, as well as recovering your data should there be a security breach? Check out this list of business cloud storage providers to help you determine the safest way for your business to store sensitive information electronically and keep your tax documents and other business records in order.
Documents You Can Shred
There are several types of business records that do not need to be physically or electronically stored. In fact, some records containing personal information are many times better shredded than not. This excludes any tax documentation, legal documents, and most of the records listed above.
Always check with your financial advisor and accountant before you begin to shred what may be important documentation for your business to maintain. Typically, though, most businesses can shred non-essential documentation that lists personal information.
If you’re still not sure whether to keep those business records or store them away, even after the period of limitations has expired, hanging onto them for a while longer is never a bad option. And, digitizing your records will make it even easier to store past documents, taking the stress off of your filing cabinet.
Create a System and Keep Your Business Records Organized for Good
Now that you’ve organized your business’ financial records and know which documents to store as physical copies, which ones can be stored electronically, and which ones can be shredded, the next step is to come up with a system for filing and storing the right documentation.
One of the easiest ways to get your business records in order is with the help of a SCORE mentor. A mentor will direct you to the best resources for managing your records and help you create a system to keep your tax documents and other business records in order. Contact a SCORE mentor today.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.