Record Retention

Related Terms: Internal Revenue Service Audits; Sarbanes-Oxley

Record retention refers to the storage of records no longer active. Some records such as birth and marriage certificates, discharge papers from the armed services, naturalization papers, wills, property titles, insurance policies, and other important records are typically held for life by individuals. Businesses retain financial records for tax reasons or to maintain historical information; certain other records must be kept because required by law. Records typically fall into four categories: those securing property such as titles or shares; those that mark certain crucial events such as businesses incorporations; those used for assessing operations; and those collected or retained in compliance with government regulation.

For the small business, retention of financial records on income, expenses, and withholdings and payment of taxes are those most commonly retained. Under Internal Revenue Service (IRS) guidelines these should be held for at least three years or until the statute of limitations on an IRS audit expires.

Records are normally retained as documents. In 1997 IRS issued new rulings related to storage of business records, essentially approving of the practice if such storage is accompanied by appropriate safeguards.

TYPES OF RECORDS

Businesses generate three main kinds of records: income, expenses, and capital expenditures. Income includes the revenue from sales of products or services, including both cash receipts and the collection of receivables. Expenses include cash disbursements and accounts payable that cover all operating expenses. These records should be maintained continuously. In the case of expenses, the records must not only prove that an expense was incurred, but also show how it was related to business. This is particularly important in the case of meals and entertainment expenses, for which the records must indicate the date, place, amount, and purpose of the expenses, as well as the type of business relationship with the person entertained.

It is also important for small business owners to keep records for major capital purchases to determine depreciation for tax purposes. These records must include the date and place of purchase, a complete description of the item, the amount paid, how it was purchased, and the date when it was put into service for the business. Keeping these basic business records enables business owners to track their progress, identify problems, and take advantage of all possible tax deductions.

Small businesses that employ people other than the owner or partners are required by the IRS to keep detailed payroll records. In fact, there are a total of 20 different types of records that must be kept for income tax withholding, FICA (Social Security) tax withholding, and FUTA (federal unemployment) taxes. These records—which include employees' names, addresses, and Social Security numbers, the amount and date of wages paid and withheld, and the amount of each type of tax paid, among other things—must be retained for at least four years from the time the relevant taxes were due or were paid, whichever was later. Experts also recommend that small businesses keep careful records regarding any automobile, life, fire, health, and other insurance coverage they hold. These records should list policy numbers and carriers, amounts of premiums and dates paid, and information on claims.

A variety of government requirements for record storage exist for specific cases. Under the Sarbanes-Oxley Act of 2001, which enacted accounting and auditing reforms for publicly traded companies, record retention requirements relating to all manner of insider dealings has imposed new costs on public companies, including stringent requirements to safeguard electronic records. Companies that work as federal contractors are bound by employment rules similar to those of the federal government itself and must retain records on hiring, firing, and other personnel actions—not least resumes received over the internet. Environmental regulations require record keeping on process effluents and hazardous waste disposal events. Recordkeeping regulations also apply under the Occupational Safety and Health Act (OSHA). Keeping up with all the rules is difficult for the small business owner unless he or she carefully reads the industry's trade publications which typically report changes in such rules. A sensible alternative is simply to retain all record related to money, people, property, safety, technology, law, and the environment.

RECORD-RETENTION POLICIES

Retaining all records or retaining some categories of records (and different categories for different periods) are part of a "record retention policy"—whether viewed as such or not. People concerned with records speak of "junk drawer" finances, indicating the worst such policy short of throwing things away: the more or less careful ferreting away of papers into a drawer on a vague hunch that they might be necessary later. More orderly arrangements, under which the company has well-developed rules on document handling, represent a genuine policy. Retention is thus part of orderly administration.

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