Filing Tips: Better Record-Keeping for Your Business

by Margot Carmichael Lester, Staples® Contributing Writer

Let’s get one thing straight from the beginning: You don’t want to permanently get rid of any document that relates materially to your business operations. That includes tax, financial, legal, medical, insurance and employment data.

Now, that doesn’t mean you have to keep hard copies of everything “in perpetuity,” as the professionals like to say. A lot of this you can keep electronically from the beginning or after a few years. But don’t do it haphazardly.

“A small business should ensure that it maintains a thorough document and records retention policy so that it has appropriate support and documentation for its tax filings in the event of a federal or state tax examination,” says Steven M. Packer, CPA, senior manager of the Tax Accounting Group at Duane Morris LLP in Philadelphia, PA. Such a policy can help you maintain “adequate and continual support, both on a current and ongoing basis, of your current and historical financial position and results of operations for financing and succession planning purposes, and to aid in the eventual sale of the business.” Your CPA or lawyer can help you develop and maintain this policy, but here are some quick filing tips to get you started.

What to File

“Generally, keep good records to support all items of income and deductions or expenses,” counsels Anthony Criscuolo, CFP®, a financial planner and client services manager with Palisades Hudson Financial Group in Fort Lauderdale. Also, keep anything else related to running your business, such as:

  • Income, Employment & Sales Tax Records: Experts advise that you retain tax records in some form forever. The IRS suggests keeping returns and supporting documents for a minimum of three years, but there are exceptions. Hold on to all records of employment for at least four to seven years, and maintain accurate records for sales tax exemption purposes. If you sell items wholesale or sell directly to tax-exempt organizations, keep your retailer resale certificates, too.
  • Legal Documents: Consult with your attorney for guidance on what legal documents you need to keep and in what form, as there may be no specific time limits for keeping partnership contracts, employee documents, and non-disclosure and non-compete agreements.
  • Asset Records: Maintain records related to annual depreciation and the gain or loss from sales, including documents that show when and how you acquired the asset, purchase price and cost of improvements, how the asset was used, Section 179 and depreciation or casualty loss deductions taken, how and when you sold the asset, how much you were paid for it, and any expenses related to the sale.
  • Gross Receipts: Keep documents that show amounts and sources, such as cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and 1099-MISC forms.
  • Purchase Records: Hold on to purchase records showing the amount paid in canceled checks, plus cash, credit/debit card and mobile payment receipts and invoices. If you’re a manufacturer or producer, keep documentation of the cost of all raw materials or parts you purchased to turn into finished products.
  • Expense Records: Save documents that show business operating costs beyond purchases, such as canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash receipts. Include documentation of travel, entertainment and gift or transportation expenses if you plan to take those deductions.

For most of these records, digital copies are OK. But some paperwork requires a raised or notary seal, or an original signature, and so must be kept on paper. Ask your attorney and CPA for definitive guidance.

“The digital records should replicate the same documentation that was previously stored in hard copy,” says George Malina, partner-in-charge of Accounting Services with Sikich LLP in Naperville, IL. “The IRS requires that a taxpayer must be able to maintain and make available to the IRS — upon request — documentation of the accounting software processes that create, modify and maintain the retained books and records; provide sufficient information to support and verify entries made on the taxpayer’s return and to determine the correct tax liability; and evidence the authenticity and integrity of the taxpayer’s books and records.”

In other words, document your documentation process.

How to File

One easy way to keep these different support documents in order and easily retrievable is to establish a filing system for hard copies, as well as a similarly organized digital or cloud storage system. Arrange the files by year and, in some cases, month or quarter. The level of organization depends largely on your business’s specifics, so ask your CPA to weigh in.

Store paper files in a fire-resistant filing cabinet, and if you want to be super safe (which you do), scan them and keep an electronic copy with your other digital records on an external hard drive and cloud storage system. This redundancy ensures you can always get your hands on your information.

A good filing program is like an insurance policy — it helps in those worst-case scenarios, like if the IRS or your state department of revenue requests additional information or copies of documents, or legal matters or medical issues surface.

“I’ve kept an NDA for 15 years, and it has become invaluable to me in a lawsuit that was filed just this year,” says Orem, UT–based attorney Lee Phillips. ”If there is anything hanging out there related to the documents you have, you had better keep track of them.”

Good records are also helpful in more positive situations, according to JeFreda Brown, CEO of Pinson, AL–based Goshen Business Group. Organized documents are useful when assessing your operation’s overall financial health, applying for a loan, seeking investors, or going after state or federal contracts. “They will request certain documents from you during the whole time you have a relationship with them,” she says.

As you can see, keeping your records properly filed isn’t just good organization — it’s good business.

DISCLAIMER: This information is only provided for general informational purposes, and should not be considered as offering individualized tax advice. Tax laws are complex; please consult your tax advisor on specific issues related to your tax situation.  

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