If you are new to owning a home business, you have probably discovered the mountain of paperwork a small business generates. How long you must keep those records depends on the type of documents they are, what deductions they support, and how honest you’ve been in preparing your business tax returns.
The long arm of the IRS
I’m a 7th generation small business owner and learned from Dad that certain business records should be kept indefinitely. This lesson hit home several years ago when Dad’s business records were audited following a change in operation. Part of the audit included proving a depreciation schedule on his farm, which meant digging through business records that were at least 25 years old.
The arm of the IRS can reach pretty far back when it comes to an audit and proving certain deductions. This is the reason why the IRS recommends keeping certain business-related documents forever.
Small business records to keep indefinitely
Most tax professionals agree that documents relating to property ownership and property depreciation should be kept indefinitely. Other records the IRS wants us to keep include the registers & ledgers that document our income and business expenses, our inventory, and tax returns (both federal and state). To sum up the records to be keep indefinitely, these include:
–Ledgers, check registers, and financial statements,
–Balance sheets and profit & loss statements
–Inventory records and depreciation schedules
–Deeds to property, closing documents, and rental or purchase agreements
–Tax returns, tax bills & statements, sales tax returns, inventory reports
Short term record storage
As far as the rest of your business records, that’s something to discuss with your accountant since each small business has it’s own unique set of documents. My accountant recommended that I hold onto my set of business records for 10 years before purging them. Your accountant may have other ideas.
A final point worth a mention is that if you don’t file returns or file fraudulent returns, there’s no statute of limitation as to how far back the IRS can do. This is why the IRS recommends that tax cheats keeps all their records indefinitely.
For more information about record retention schedules, both borlandcpa.com and qbalance.com have handy (and free!) schedules posted on their sites that are worth perusing.
More articles by this contributor:
How long do I hang onto my tax documents?
How to prove self employment income.
Sorting and disposing of personal financial documents after a death.