This time of year I am often asked about record keeping requirements. As people are cleaning out offices and storage space a common question is ‘How long should business owners keep their supporting documents for tax purposes?’
For income tax purposes, the minimum amount of time a business should retain its documents is 3 years. This 3 years period assumes all tax returns were timely filed, were not fraudulent and there is no understatement of income in excess of 25% of the gross income shown on the return. The statute of limitations does not begin until a return is filed, so if a business is not filing returns those records should be kept until 3 years after the return is filed.
If there is an understatement of income that is more than 25% of the gross income shown, the IRS has 6 years to audit assess additional tax. If a business is claiming a loss for worthless stock or bad debt, the period of record retention is 7 years.
For this, reason it is advised that businesses keep all supporting documents a minimum of 7 years.
There are some other items that should probably be kept even longer. For example, items of support for depreciable property should be kept for 7 years until after the property has been disposed. After all, if your 2008 tax return is audited you may have to prove that current depreciation is being properly calculated for assets placed into service more than seven years earlier. Businesses will also want to be able to prove that sold or disposed assets are properly reported until the stature of limitations expires.
For payroll tax purposes, all supporting documents (timesheets, employee W-2’s, form 940s, 941s, etc.) should be kept for 4 years past when the tax comes due or is paid whichever is later. So for unpaid payroll taxes the clock doesn’t start ticking until the balance due is paid in full.
Electronic records are acceptable, so if space is the main issue of concern converting paper documents to some electronic medium may allow businesses to free up space.
As you wind down your 2009 activities, I hope this helps you make space to have a worry free 2010.
For income tax purposes, the minimum amount of time a business should retain its documents is 3 years. This 3 years period assumes all tax returns were timely filed, were not fraudulent and there is no understatement of income in excess of 25% of the gross income shown on the return. The statute of limitations does not begin until a return is filed, so if a business is not filing returns those records should be kept until 3 years after the return is filed.
If there is an understatement of income that is more than 25% of the gross income shown, the IRS has 6 years to audit assess additional tax. If a business is claiming a loss for worthless stock or bad debt, the period of record retention is 7 years.
For this, reason it is advised that businesses keep all supporting documents a minimum of 7 years.
There are some other items that should probably be kept even longer. For example, items of support for depreciable property should be kept for 7 years until after the property has been disposed. After all, if your 2008 tax return is audited you may have to prove that current depreciation is being properly calculated for assets placed into service more than seven years earlier. Businesses will also want to be able to prove that sold or disposed assets are properly reported until the stature of limitations expires.
For payroll tax purposes, all supporting documents (timesheets, employee W-2’s, form 940s, 941s, etc.) should be kept for 4 years past when the tax comes due or is paid whichever is later. So for unpaid payroll taxes the clock doesn’t start ticking until the balance due is paid in full.
Electronic records are acceptable, so if space is the main issue of concern converting paper documents to some electronic medium may allow businesses to free up space.
As you wind down your 2009 activities, I hope this helps you make space to have a worry free 2010.
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