Every year, tax season comes and goes leaving a flurry of tax documents, receipts and other financial paperwork behind. Couple that with all the rest of the paperwork that comes along with running the day-to-day operations of your business and it can quickly feel like you are buried under a mountain of paper.
With storage space at a premium for many businesses, reducing clutter can help you run your business more smoothly and be better organized, allowing you to provide the best service to your clients. But what about all those tax documents?
The thought of throwing out tax documents can be a little intimidating. After all, you don’t want to be left with missing documents in the event of an IRS audit, and end up in hot water.
However, there may be a way to give yourself some relief from the ever-growing pile of paperwork. Most tax documents and records have a corresponding time period attached to them before they “expire” or otherwise lose relevance. This is known as their individual statute of limitations. Depending on the action, event or expense recorded in the document the statute of limitations can vary from a couple of years to something you will want to keep forever.
Here is a rundown of some important tax document retention guidelines for common and relevant documents that may be helpful as you try and cut down on paperwork clutter.
To err on the side of caution, we recommend all our clients to keep their tax returns indefinitely. However, the statute of limitations on your annual tax returns can vary depending on several circumstances. Generally, tax returns and all documents containing supporting items carry a retention timeline of 3 years from the date in which they were filed.
But, before you go rushing off to toss out any returns from 3+ years consider some of these conditions that may alter this timeframe. A tax return filed with an understatement in your adjusted gross income by 25% or more will extend the limitation period to 6 years. Any return that went unfiled or filed fraudulently has no statute of limitations and copies need to be kept permanently.
Business Property Costs/Deduction Documents
Certain documents are necessary when determining any gain or loss of business property value in the event of sale or disposal. Therefore, be sure to keep an itemized invoice of equipment or property purchases.
Records that back up any expenses or deductions to your property need to be kept for as long as you own the property associated with the documents plus an additional 7 years.
Current and past employee records are extremely important to retain. This covers W-2s, W-4s, 1099s, and other relevant tax forms and documents. However, these records will eventually lose some relevance.
Generally, employee records should be kept 3 years after the employee leaves or is terminated from your business. Employee tax records and documents supporting earnings should be kept longer, at least 4 years.
During an audit, the IRS may check vehicle mileage logs, receipts and other documents supporting your business travel expenses like plane tickets or hotel bills accrued attending an industry trade show. These kinds of documents need to be kept in your records for the duration of their 3-year statute of limitations.
Sales Tax Returns
Sales tax return document retention is unfortunately not nearly as straightforward and varies from state to state. Here in Indiana, however, the statute of limitations is 3 years following filing. The length of retention can range from 3 to 6 years, depending on the state.
Bank Card Statements
Company bank account and credit card statements and records that support business expenses come with quite a bit of scrutiny and thus carry a much longer retention window. It is the best practice to hold onto these reports and any additional supporting information for 7 years.
These are just a few of the common tax documents in your files that you may be trying to get rid of, but that isn’t all of them. If you have other documents and reports taking up space that you don’t know what to do with, a safe mantra to have is “if you don’t know, save it!” We can help.
Slattery & Holman is a full-service accounting and consulting firm serving business owners throughout Indiana. We can help you determine what tax documents you need to hold on to and how long you need to keep them. Good record retention practices save you a lot of trouble down the road and reduce paper clutter. Allowing for more time to keep your office organized and running smoothly.