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Keep It or Shred It? Best Practices for Record Retention

 
 

While the crates of classic rock albums in your attic are a record collection worth keeping, chances are you’re less enthusiastic about your “other” record collection: the high volume of old business records taking up valuable space in your office or on your hard drive. Even if you and your bookkeeper have established an efficient filing system, an overabundance of records can make it difficult to find sought-after documents.

 

Periodically purging old records can be a satisfying way to cut clutter, stay organized, and save space (whether physical or digital), but it’s important to know which documents you may need down the road. The next time you get into a cleaning frenzy, follow these record retention guidelines to avoid discarding something important:

 

Keep Permanently

Certain events, transactions, and legal agreements may require supporting documentation years later. For this reason, it’s important to hold on to records such as:

  • Tax returns (income, sales, and payroll)
  • Your general ledger
  • Basis information (such as invoices) and depreciation schedules for assets you own
  • Supporting documents for tax returns that apply to a future return, such as records for net operating losses, suspended losses, or R&D tax credits
  • Property documents:
    • All records connected to currently owned property
    • Records for recently sold property
    • Documents for both properties involved in a tax-deferred exchange

 

Keep for 7 years

Any records used in tax filing as evidence of your business income, deductions, or credit should be kept until the IRS’ period of limitations runs out. As a best practice in case of an IRS audit or legal dispute, keep these records for at least 7 years:

  • Invoices
  • Purchase receipts and contracts
  • Written guarantees
  • Work orders
  • Purchase orders
  • Delivery slips
  • Cash register receipts and credit card statements
  • Transaction-related emails and other correspondence
  • Bank deposit slips and canceled checks
  • Employee tax records
  • Worker health coverage forms

 

Exceptions to the 7-year rule

The 7-year rule should be modified under certain circumstances. Hold related documents for at least 7 years from the date of:

  • A late tax return
  • The resolution of an objection or appeal to an IRS ruling
  • The end of the tax year in which you end a nonincorporated business
  • The end of the tax year in which you formed or dissolved a corporation

 

Think before shredding

Before shredding business documents, also consider whether these records could be needed for other nontax purposes, such as by your insurance provider or lender.

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The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.