It’s a paper world. In your business and even in your personal life, you have documents that seem to accumulate. When it’s spring cleaning time, do you throw caution to the wind and throw all of them out? How about scanning all of the documents to your computer’s hard drive? Hopefully, documents can be backed up properly to the Cloud or another safe location. What about destroying the underlying document?
Scanning documents and backing them up is a good option. Even then, is there a period when you should no longer have to worry about those documents? And will you remember to scan every receipt for a purchase for a tax-deductible expense or asset? How about the purchase of equipment, business property, real estate, expense items, etc.? What about your monthly bank statements, employment tax records, Form 1099s, W-2 forms, and W-9s?
Rule of Thumb
Although there is no one-size-fits-all answer, here is a reasonable rule of thumb related to documents:
(1) If a document relates to a deductible expense for tax purposes, make sure you keep those records for at least three years from the date you filed your original return. The IRS has a normal three-year statute of limitations for most returns. If the IRS could maintain that you have a “substantial omission of gross income exceeding 25%,” then it’s better to keep those records. A time period of six years is established, as the statute of limitations is extended.
(2) Records that relate to the cost or capital expenditure for an asset should be kept until that asset is disposed of, plus whatever tax period may apply.
(3) Finally, some records may need to be kept indefinitely. In the event that a tax return is not filed, the statute of limitations never runs for that tax year, or if the IRS determines the tax return was fraudulent.
Those general rules of thumb are not definitive and absolute, and in some cases may be shorter or longer depending on other varying circumstances. In short, it is still a paper world, so getting accustomed to the scanning and backing up procedure may be the best solution.
Do you have more questions about retaining business documents? Feel free to contact us.