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Don’t Throw That Away
By Mark Landsbaum
Which business documents should you keep, and for how long? You’d better know
the answers because getting it wrong can be costly.
If challenged by the
IRS, you’ll probably lose if you can’t produce supporting documents.
Disagreements with clients and vendors similarly are weakened without
documentation. Without records, employee disputes are your word against the
disgruntled hireling’s.
Unfortunately, there is no single set of rules
that tell you how long you need to hold onto important documents. Complicating
matters, statutes vary from state to state.
Judee Slack, an enrolled
agent and small-business advisor in Southern California, points out, “many
states make adjustments based on the IRS results.”
So what does the IRS
say about document retention? Nothing very straightforward.
The IRS
advises that, “your recordkeeping system should...include a summary of your
business transactions,” such as accounting journals and ledgers to show gross
income, deductions and credits. Supporting business documents include purchase
and sales records, payroll, invoices, receipts, sales slips, paid bills, deposit
slips and canceled checks.
The IRS also says that the length of time to
keep any document depends on “the action, expense or event the document
records.”
That’s not much help.
To find the answers to the nagging
questions of what to keep and for how long, we consulted several sources: the
IRS, the American Institute of Certified Public Accountants and CCH Tax and
Accounting, a leading provider of business, legal and tax
information.
Before adopting any of these retention tips, check with your
legal and tax advisors. And remember, when in doubt, don’t throw it
out.
Keep Permanently -
General ledgers and journals
-
Payroll records, including W-2s, 940s, 941s
-
Year-end financial statements
-
Tax returns and supporting documents
-
Depreciation schedules
-
Partnership and shareholder agreements
-
Articles of incorporation, by-laws, meeting
minutes and other governance documents and licenses
-
Copyright, trademark and patent registrations
-
Retirement plan records
-
Cash receipts and disbursement ledgers
-
Employee handbooks and training manuals
-
Mortgages and deeds
-
Tax and legal correspondence
Keep
For 10 years
-
Bank statements and cancelled checks
-
Accounts payable documents
-
Accounts receivable documents
-
Invoices and billing information (to customers and
from vendors)
-
Time reports
-
Leases
-
Contracts with clients and
suppliers
Keep For Seven Years
-
Expense reports
-
Employee agreements or contracts (keep for seven
years after termination)
-
Employee termination records and the personnel
file of the terminated employee
-
Documents related to litigation (keep for seven
years after termination of legal proceedings), although some material should be
kept indefinitely if needed for licensing, regulatory or insurance purposes
-
Inventory documentation
Keep For
Three Years -
Employment applications
-
Employee disability and illness benefit
records
-
Expired insurance policies
-
General correspondence