Small businesses are the backbone of America (and most other countries). They do more than provide economic freedom to the owner – they also create more jobs than large businesses and stimulate economic growth.
Back in 2014, small businesses added a whopping 1.4 million new jobs. Almost 40% of that number came from small businesses with less than 50 people.
Why is all of this important? Because it goes to show your importance in sustaining your small business.
Unfortunately, there are still a large number of small businesses failing each year. Roughly two-thirds of businesses last two years, half of all businesses survive for 5 years, and only one-third make it to their 10-year anniversary.
The number one reason behind small business failure? Financial issues. Around 82% of businesses fail due to cash flow dilemmas.
This demonstrates the importance of maintaining your financial records, even if it means hiring a bookkeeper or paying for tools to help manage your finances.
So how long should you keep financial records for your business?
Let’s take a look.
Why Keeping Business Financial Records is So Important
Surely, you know how essential certain financial records are, especially when it comes time to filing taxes. It’s the one thing that can save you from an audit that leaves you owing thousands of dollars in fines and penalties.
By keeping on file key financial documents, you can:
- Prepare your business tax returns
- Determine the progress of your business
- Provide evidence in the event of an IRS audit
- Project your tax liabilities
- Separate your business and personal expenses
- Track all of your business deductible expenses
It’s not uncommon for small business owners (especially those that work from home) to mix up their personal finances. And others may toss out key documents that could otherwise prevent an unfavorable outcome in an audit.
So be careful.
Next, let’s review what financial records you should keep and for how long.
How Long to Keep Business Income Tax Returns
This one is a no-brainer – but some business owners fail to keep these documents long enough. Some believe they only need to keep their tax returns (and supporting evidence) for only three years.
But as it turns out, you should be keeping your records along the lines of 7 years. Here’s a quick breakdown of how long you should keep tax returns:
- 3 years from the date you filed your original return or 2 years from the date you paid the tax (whichever is later).
- 7 years if you file a claim with bad debt deductions or loss from worthless securities.
- 6 years if you didn’t report 25% or more of the income that should’ve been reported.
- Indefinitely keep records if you didn’t file a tax return.
- Indefinitely if you filed a return that was fraudulent.
- 4 years for employment tax records (from the date the taxes are due or paid, whichever is later).
- 3 years if 3, 4, and 5 don’t apply to you.
These are the period of limitations that apply to income tax records, according to the IRS. So be sure to use this as a guide of how long to keep financial records.
How Long to Keep Paperwork for Mortgages and Other Loans
Some small business owners expand quickly, requiring them to upgrade from their home office to a legit location. In some cases, you need the extra space to accommodate full-time employees.
This is where mortgages and business loans come in handy. Be sure to keep all documents of your business-related loans, including all payments made, forever.
You should do this regardless of whether you paid off the entire loan or not. You never know when you’ll be questioned about your payments towards the loan (either by the bank or the IRS, if you claimed the interest as a deduction).
Also, if you have a company vehicle you purchased via a loan, this too should go into your file indefinitely.
How Long to Keep Property Records
Maybe your business is doing so well that you’ve purchased another property. If so, then you’ll need to keep these records on hand indefinitely or for at least six years after selling the property.
Be sure to keep the purchase documents, along with any substantial improvements and renovations made to the property.
Also, document all expenses associated with the purchase and sale of the property. This includes legal fees, commissions paid to realtors, and so on.
However, if you’re renting a property, then you don’t have to keep the rental agreement after you relocate and received your security deposit.
How Long to Keep Bank Records
It’s not necessary to keep every single check you write or receive. However, any transactions directly related to your income or expenses should be kept with your tax documents for the above recommended time frames.
If you bank online, then gaining access to your financial statements and transactions will be seamless.
The same goes for all of your credit card receipts and statements.
Speaking of receipts, let’s take a quick peek at what types of receipts you need to keep on file for tax purposes.
Which Receipts Should I Keep?
The IRS makes it blatantly clear that businesses need to maintain essential financial documents in case of an audit or other legal ramifications. This includes your tax returns and supporting business documents, such as receipts.
But does this mean you need to keep every receipt you receive? Not at all. Here’s a rundown of what’s important.
Inventory Invoices and Receipts
Inventory receipts and invoices are directly related to your business operations. If you run a restaurant or shop, then buying new inventory is key to keeping your doors open.
All documents that show the payee, vendor, purchase item, the amount, and proof of payment should be kept. It’s also a good practice to keep all canceled checks to show proof the person you gave it to cashed it.
Most assets businesses own depreciate over time. Keeping track of this can be difficult, especially if you’re not an accountant by trade.
So to help you in keeping track of it all, you should keep on file any records relating to money spent on your assets. This includes the purchase of new equipment, servicing old equipment, and equipment upgrades.
This will come in handy if you own computers, vehicles, office equipment, and other machinery. Then in the event you sell an asset, keep a record of this as well.
Marketing and advertising are key to building visibility for your small business. Nonetheless, it’s also an expense you can write off on your tax returns.
Be sure to keep track of all your marketing materials and ads purchased. This includes business cards, web hosting, web design, online and print ads, billboards, and so on.
Business Vehicle Expenses
This can be a tricky one if you use your personal vehicle for business purposes. You’ll have to be very keen about separating the use expenses.
For instance, the gas you use for deliveries vs going on a family vacation. This is why it’s best to have a separate vehicle.
Either way, be sure to keep the receipts for the car and truck expenses directly related to the operations of your business. These will come in handy when it comes time to make deductions for business vehicle expenses and asset depreciation.
Now, there are a variety of other business-related expenses you should keep track of as well. For instance, if you’re continuously attending workshops, taking courses, and enrolling into school to continue your education, then you can deduct these from your tax returns.
And once you do, you’ll need proof that these expenses incurred at the amount you claimed. Some of the other expenses to consider include:
- Entertainment for clients
- Office supplies
- Contractors and professional services
- Travel expenses (hotel, rentals, food)
Ideally, you should keep all your expense receipts for as long as the IRS can audit you. Worst case, you should keep them at least seven years from the date you file your tax return, unless stated otherwise by the IRS.
Maintaining Your Financial Records
At the end of the day, you have two options for maintaining your financial records. You can either do paper-based or electronic record keeping!
Of course, the latter will streamline everything, making it easier to manage and track down the documents you need.
One method of electronic records keeping is with Eversign. Our platform allows you to electronically sign and secure important business documents.
This includes financial, HR, and tax documents. You’ll never have to worry about misplacing or losing key documents that can get you out of an audit or lawsuit.
Keeping records electronically also helps reduce paper waste, increase savings, and enhance your space. Imagine not having a wall of filing cabinets taking up valuable square footage.
Do keep in mind that you’ll need to keep originals for certain documents, such as your business license, incorporation, contracts, and so on.
However, if you’re using Eversign to sign documents, then these are the originals, which are safely kept for you in the cloud.
You’ll never have to worry about how long to keep financial records because they’re kept forever (or until you delete them).
So what are you doing to maintain your financial records? Let us know in the comments what methods work best for your small business!