Record Retention: What to Save, What to Toss

One look around the office, with its stacks of files, documents, statements and other records, may tempt you to purge the paper. But before you fire up the shredder for some good old-fashioned de-cluttering, you'd better know a thing or two about which records you need to keep and which you can ditch, says tax attorney Frederick W. Daily, author of Tax Savvy for Small Business.

While some paper just takes up space, other records can be important in case of a tax audit, a business dispute or in your dealings with employees, vendors or clients.

'The Achilles heel of small businesses is record keeping in general. I have found particularly when it comes to audit that small businesses, by and large, do not keep very good records. I think it's because it just doesn't add to the bottom line,' says Daily. Following is a run-down of some of the most important items to save and how long to save them:

• Income tax returns and supporting documentation—Whether federal or state, corporate, personal or payroll, Daily says that the most important area of record keeping for small businesses is that which supports tax claims. That includes proof of income, such as pay stubs, 1099s, invoices and bank statements. In addition, you should keep receipts, invoices and other proof of deductions that you've taken. And, of course, you should keep copies of the tax returns themselves. All of this documentation should be kept for a period of six years from the date the return is filed, says Daily. The typical audit window is six years, except in cases of fraud.
• Employee records—David Flannery, director of the BS program in financial services at Bryant and Stratton College's Virginia Beach, Virginia campus says that it's a good idea to keep employee records, including applications, performance reviews, contracts, salary information and the like, for the six-year window as well. However, he suggests that businesses consider adopting uniform policies on destruction of employee records, as keeping sensitive information (such as social security numbers) on file could be problematic if the company's security is breached. 'It's important to keep these records to document tax returns, but you may not want to be responsible for protecting it longer than necessary,' he says.

There are myriad other documents that businesses save, ranging from utility bills to credit card statements. In addition, says Daily, it's a good idea to check with your own tax advisor to determine whether you should keep certain records for longer periods of time.

For more information on records worth saving, have your customers see the IRS's 'What Kind of Records Should I Keep' page, and this time-based list of how long each type of record needs to be retained, produced by the Massachusetts Society of CPAs.