It is a challenge to keep track of documents, receipts and records over the course of a year. For small business owners, this is particularly daunting. Whether you’re using manila folders, web and mobile apps or your laptop, it is essential to know what documents and records to keep, what to shred or destroy, and what can be safely tossed over the course of the year.
The last thing you want to do is reach tax season without the right information at hand for yourself or your accountant. Certain documents and records are critical for other purposes as well, such as insurance policy underwriting, applying for a bank loan, and maintaining legal compliance with state and local laws.
Here are some essential tips to keep in mind as you work through the year in your small business:
What to Save
Documents confirming sources and amount of income (including wages, dividends, distributions, investments, interest payments, etc.), including:
- Form W-2
- Form 1099
- Form K-1
- Bank statements
- Form 2439 as well as brokerage and mutual fund statements for investments
Documents pertaining to deductions and tax credits, including:
- Child care expenses
- Medical and dental expenses
- Charitable gifts
- Business use of your home (for the home office deduction)
- Vehicle sales tax
- Alimony payments
These documents typically include receipts, invoices, mileage logs or reports, bank/credit card statements and cancelled checks.
In addition, you need to keep any documents pertaining to property such as:
- Closing statements
- Proof of payment
- Insurance records
- Receipts for home or property improvements
What to Shred
All of the documents addressed above can and should be kept for at least three years, which is the IRS minimum requirement for retaining tax return forms and any supporting documentation related to the content of the returns (the official standard is three years from the April 15th filing deadline). However, many states add an extra year — and the IRS itself increases the range to six years specifically for W-2s, 1099s and other forms that report income (this is because the IRS has six years to follow up if you’ve failed to report income).
As an employer, you should keep employment records, gross receipts, invoices, bank statements, proofs of purchase, warranty documents, asset records, database content, emails, etc. for at least four years.
Finally, note that documents relating to securities that have lost their value or any bad debts should be kept a minimum of seven years.
So what’s the real answer to this question of what to shred? The safest answer is any document in the categories noted here, except those pertaining to worthless securities or bad debt, that is at least six years old as of the filing deadline for the applicable tax year, is safe to shred. You can always shred sooner if you are confident that you’ve exceeded the IRS or state compliance timeframes as noted.
And of course, business and property records as well as investment and retirement plan documents should be kept indefinitely.
What to Toss
This is a bit of a ruse, as the answer is simple: Nothing. Nothing we have discussed here should be tossed out without being shredded first. Basically, you either keep it or shred it, plain and simple. Today, this is as true for digital documents as it is for physical ones — so don’t forget to double down on establishing good file management standards and protect your server and files with appropriate passwords and other cybersecurity practices.
What to Do Now
Clearly, record keeping is a huge responsibility and a great challenge for small business owners. Use the lists in this article, first and foremost, to remind you of what documents you should be collecting and keeping track of. Organize them into annual archives to make it as easy as possible to clearly identify what to keep and what to shred. Feel free to reference these official IRS publications for more informant and details: