December 1, 2003 -- What records does your business need to keep, and how long do you need to keep them?

There are several categories of records that are important to a business, some for internal purposes and some for tax returns and other government requirements.

Let's take a look at these by category.

Tax and Accounting

First, consider the records you need to substantiate your annual income tax return. The IRS says that you must maintain adequate records to support almost every item of income and expense that you claim. That means you must be able to produce receipts, invoices, canceled checks, or banking records supporting all expense items. Similarly you should keep sales slips, invoices, or bank records to support all income items.

Most businesses have adequate accounting systems to capture routine transactions, but not for nonroutine transactions such as the purchase of depreciable assets. When you buy a car, computer, or piece of office equipment, be sure to file all purchase documents, assign an inventory number, and immediately set up a depreciation schedule.

Good recordkeeping for travel and entertainment expenses is essential. Although the rules can be complex, in general you should capture where, when, who, how much, and the business purpose for each expense. A well‑designed standard expense report form can help insure that your records contain all the required information. Also, if you have employees who drive on company business, make sure they keep an auto log showing the miles driven for each trip.

Generally, the IRS can audit a tax return for three years after the date it was due or the date the tax was paid, whichever is later. However, if there is a major understatement of income, they can audit for six years after the due date (or almost seven years after the tax year). For that reason, you should keep most income tax records for seven years.

Keep real estate records indefinitely. The IRS requires records relating to employment taxes to be kept for at least four years after the date of the return or the date the tax was paid, although here again a seven‑year rule is safer.

Corporate Records

Every incorporated business needs good corporate records, including documents associated with forming the company, bylaws, business licenses, and minutes of all board meetings. Shareholder records should include stock registers and records of all share issuances and redemptions. Also keep copies of all contracts and leases. Finally, don't forget current and terminated employee files, and records of employee pension or profit sharing plans. Most corporate and employee pension plan records should be kept indefinitely.

Computer Records

These days, more and more business records are stored electronically. While this saves time and space, it also increases the risk of accidental loss or damage. A hard disk in a personal computer can crash at any time, perhaps erasing months of data. Make sure your computer system is backed up regularly, and keep the backup copy in a fireproof location, preferably offsite.

The table below shows a recommended retention schedule for some of the more common business records.

Recommended Records Retention Schedule for Businesses

Accounting Records:

Accounts payable                              7 years  
Accounts receivable                           7 years  
Audit reports                                     Indefinitely  
Chart of accounts                              Indefinitely  
Depreciation schedules                      Indefinitely
Expense records                               7 years
Financial statements (annual)             Indefinitely  
Fixed asset purchases                       Indefinitely  
General ledger                                   Indefinitely
Inventory records                                7 years (1)
Loan payment schedules                    7 years  
Purchase orders (1 copy)                    7 years
Sales records                                     7 years  
Tax returns                                        Indefinitely 
(1) Indefinitely for LIFO system

Bank records:

Bank statements                                7 years  
Canceled checks                                7 years (2)  
Loan records                                      7 years(3)  
Electronic payment records                 7 years  
(2) Indefinitely for real estate purchases  
(3) From date of last payment

Corporate records:

Board minutes                                   Indefinitely
Bylaws                                              Indefinitely  
Business licenses                              Indefinitely
Contracts ‑‑ major                           Indefinitely  
Contracts ‑‑ minor                           Life + 4 yrs  
Insurance policies                              Life + 3 yrs  
Leases/mortgages                             Indefinitely  
Patents/trademarks                           Indefinitely  
Shareholder records                           Indefinitely  
Stock registers                                  Indefinitely  
Stock transactions                             Indefinitely

Employee records:

Benefit plans                                     Indefinitely  
Employee files (ex‑employees)          7 years (4)  
Employment applications                    3 years  
Employment taxes                             7 years  
Payroll records                                   7 years  
Pension/profit sharing plans                Indefinitely  
(4) Or statute of limitations for employee lawsuits

Real property records:

Construction records                          Indefinitely  
Leasehold improvements                    Indefinitely  
Lease payment records                      Life + 4 yrs
Real estate purchases                       Indefinitely

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