Becoming an entrepreneur means freedom – or at least it’s supposed to. Sure, you get to create your own schedule (although hectic at times).

Plus, there’s no boss to check in with or higher-ups breathing down your neck.

However, what you’ll quickly learn is that there are a ton of legal responsibilities that go along with becoming a business owner. For example, doing your own taxes (and the taxes of your employees and contractors).

There’s a lot business owners have to come to understand. Like how long to keep business documents, such as canceled checks, tax documents (and supporting data), HR documents, and more.

Not knowing this can land you in hot water with agencies like the IRS or even the courts (lawsuits can and do happen, unfortunately). On the upside, only about 0.7% of small corporations were audited in 2017.

Yet, the issue still remains -- times are always changing and the rules of business along with it. So we put together this quick guide to help update you on the most recent standards for maintaining business documents.

Let’s take a closer look.

Tax & Supporting Tax Documents – 3 Years Isn’t Long Enough

For years, we’ve heard the golden rule for keeping tax documents was three years. This is likely because the IRS has up to three years to audit a tax return.

But there’s an exception to this rule many business owners fail to realize. And it’s to their own detriment.

You can find horror stories throughout the web of business owners being asked for tax documents five or even six years after filing.

This is because there’s a statute of limitations that states the IRS can extend tax assessments up to six years after it’s filing. For a little solace – this is only done when 25% or more of your income is omitted from the tax return.

So unless you’re deducting too much, withholding income, or severely under-calculating, then you should be in the clear. This can happen when you’re making investments, accept cash payments, or do business in other ways that can make calculating your income difficult.

For example, say you sold a property for $3M and stated on your taxes that your basis (how much you invested) was $1.5M. But in reality, your basis was $500K.

Since you overstated your basis, you paid taxes on only $1.5M when it should’ve been $2.5M. If the IRS sees this flaw, then they’d have every right to audit you even if it’s 4 or 5 years later.

So as the new rule of thumb, keep your tax documents on hand for at least seven years. And if you have employees, be sure to keep theirs for at least four years.

This includes your employer identification number, wage amounts and dates, names, addresses, social security numbers, fringe benefits, tips, pension and annuity payments, tax deposits, and the occupations of each employee.

If you can get scanned copies of all the tax returns and supporting documents, then do so. Keep them on your hard drive and a back up in the cloud – can’t be too careful!

Business Asset Records Can Help You At Tax Time & Beyond

As your business begins to grow, you may buy and sell assets to improve and expand your operations. When this happens, you have to keep track of all your business asset records.

You’ll need these during tax season to ensure you enter everything accurately on your tax returns. This includes calculating deductions for the purchase of equipment.

The documents you’ll need include:

  • Receipts and bills of sale
  • Description of the asset
  • The date you began using the asset for business
  • The percentage of how often you use the asset for business and personal purposes

Then for your property sales, you’ll need the following documentation:

  • The date of the sale
  • Sales price
  • Cost for building improvements
  • Other costs associated with the sale (ads, broker fees, and so on)

But that’s not all. It’s also critical to keep track of depreciation. This is good to know so that you can identify what to deduct from your taxes.

For example, if you have a computer network system that cost you $10K, you can deduct a fifth off the cost each year you own it. This is because the recovery period is around five years. After this point, you can no longer deduct for it.

Typically, assets depreciate over the course of three, five, or seven years. Then there are other assets that can have the depreciation expense deduction accelerated.

You can check here to see if your assets qualify for the accelerated deductions under Section 179.

There’s also a bonus depreciation your assets may qualify for. This allows you to do a 50% deduction on certain new assets the first year you get them.

Then you can spread the remaining 50% over the course of five years.

As you can see, there are many reasons to keep your business asset records on hand. Once you do your tax returns, be sure to keep them for as long as the IRS can audit your returns, which we now know is up to six years.

So to be on the safe side, keep all these records for at least seven years.

So far, we’ve covered business documents that have an expiry. However, according to some experts, it’s recommended that you keep certain financial documents forever.

This includes business ledgers, journal entries, financial statements, profit and loss statements, and check registers.

Some even go as far as to say you should also keep your Board of Director information, annual reports, annual meeting minutes, corporate by-laws and amendments, and business formation documents permanently.

Then if you have other documents that aren’t used for supportive tax records, such as accounts payable and receivable ledgers, expense reports, and invoices, then you should keep these around for at least seven years.

Human Resource Files – Don’t Terminate them Too Soon!

It doesn’t matter whether you hire in-house employees or remote contractors – you’re still responsible for maintaining human resource documents.

But which records do you need to have on file? There are literally thousands of documents HR departments have to mine through, which can make document retention difficult.

First, let’s review what’s typically found in a hiring file. This will normally include all documents you used to hire and onboard employees and contractors, such as:

  • Job ads
  • Resumes
  • Employment applications
  • Job orders submitted to agencies
  • Reference checks
  • Physical exam results
  • Interview evaluations
  • Credit reports
  • Employment test results
  • Validity documentation of tests used for hiring selection
  • Application data for candidates you hired and didn’t hire
  • And other related data

This seems like a lot, but it’s required under the Equal Employment Opportunity Commission (EEOC) guidelines. It’s recommended that you keep these documents for at least a year.

However, there are some states that require employers to maintain these records for two years. These documents are crucial in the event your business is subjected to a discrimination lawsuit.

In the event you have a pending case, you’ll have to retain these records until it’s resolved. The recommended length of time is 4 years after the case concludes.

Here’s a quick breakdown of how long you need to keep hiring documents on file:

  • Hiring records: 2 years (recommended 7 years after employee leaves or is injured)
  • Drug test records: 1 year or 5 years for transportation positions
  • Payroll/timecards, etc.: at least 3 years and a recommended 5 years for terminated employees
  • Form I-9: 3 years after hire or 1 year after termination (whichever comes later)
  • Health/pension benefits info: 6 years
  • FMLA (Family and Medical Leave Act) records: 3 years
  • Personnel earning records: permanently
  • Group & employee insurance records: 6 years
  • Disability and sick benefits records: 4 years
  • Workers compensation: up to 10 years after benefits are paid
  • Employee contracts: 7 years

If you’re using a platform like EverSign for your hiring and onboarding documents, then maintaining these records is easier. Electronic record-keeping helps make everything more organized in the HR department.

Plus, you can easily look up whatever documents required for whatever reason.

Canceled Checks – Before You Bounce Them in the Trash…

There are a number of reasons why a business may cancel a check. Maybe you mistakenly ordered something you no longer need or overpaid.

But whatever the purpose, it’s important that you keep these around for at least seven years. Afterward, shred them up.

The reason for keeping canceled checks for so long is because you may need to use them as supporting data for your tax returns.  

Bank Account & Credit Card Statements – Your Tax Return Allies

It’s definitely not a good idea to throw out your bank account and credit card statements after doing your tax returns. In fact, it’s recommended that you keep these documents for at least seven years since they’re used for supporting tax records.

Now, if you’re using e-statements – way to go for lessening your carbon footprint and reducing your business paperwork.

Otherwise, you’ll need to shred these up along with any other business documents you no longer need to retain.

Making Your Record Retention and Disposal Easier

As you can see, there’s a lot of business documents that require retention – some stuff you may not have known about before. It seems like a lot to handle, but there are ways of making record maintenance easier.

For instance, going paperless is the best way to clean up your filing cabinets and drawers. You can upload your documents to the cloud, sign up for e-statements, and use EverSign software.

With these methods, you can quickly access the documents you need and never have to worry about losing them (or having them stolen). Just be sure to back them up in case of a crash.

If you’re a business owner with a record retention and disposal plan – tell us about it in the comments!