What records should you keep?

13 Apr What records should you keep?

Posted at 03:28h in

Blog

by Becky Brown  •  0 Comments

For many busy small business owners, tax season is a time of digging through old documents, receipts, and bills to make sense of their financial year for filing purposes. So, now you've finally paid your taxes and you're ready to throw out all of your records?

Not so fast!

According to Forbes, "The IRS is one of the few courts where failure to produce proof of your claims results in the assumption that you are guilty of tax fraud." Thus, it's a really good idea to save the financial documents you used to create your taxes to defend yourself in the unlikely event of an audit.

But, when is it okay to shred and recycle?

The IRS has some general guidelines for basic record-keeping for tax purposes and the types of documents to keep which we've summarized for you below.

Even in the era of paperless everything and  e-filing, here at KYB we want you to be as document-prepared as possible, either in paper or electronic format. To make things easy for you, here's a summary of the IRS guidelines.

Supporting tax records that should be kept include:

  • Gross Receipts -- the income you receive from your business.

  • Purchase Receipts -- items you buy and resell to customers.

  • Expense Receipts -- costs you incur (other than purchases) to carry on your business.

  • Travel & Entertainment Records -- If you deduct travel, transportation, entertainment, and gift expenses, you must be able to prove certain elements of the expenses, including who you were with and what the business justification of the expense was.

  • Asset Receipts - any kind of physical property (i.e. machinery, furniture) that you own and use in your business.

  • Employment Records - any document related to your employment taxes.

Here are some timelines suggested by the IRS:

3 YEARS

Keep tax records for three years if the following do NOT apply to you:

  • You did not report income that you should report, and it is more than 25% of the gross income shown on your return.

  • You did not file a return.

  • You filed a fraudulent return (the IRS’s words, not ours! LOL).

4 YEARS

Keep employment tax records for four years after the date that the tax becomes due or is paid, whichever is later.

 6 YEARS

Keep your tax records for six years if you did not report an income that you should report, and it is more than 25% of the gross income shown on your return.

 7 YEARS

Keep your tax records for seven years if you file a claim for a loss from worthless securities or bad debt deduction.

  • Cancelled Checks related to taxable activity
  • Credit Card statements 

INDEFINITELY

Keep your records indefinitely if you:

  • did not file a return

  • filed a fraudulent return (that’s seriously what the IRS says!)

Other statement to keep forever:

  • Brokerage statements for taxable accounts. For a mutual fund with 30 years of reinvested dividends, each dividend payment is part of the cost basis. Without knowing the cost basis, the IRS could argue that the entire value of the investment be treated as gain.
  • Third, keep IRA nondeductible contribution records forever. You may need those records every year that you withdraw money in retirement to show that a portion of the withdrawal is not tax deductible.

These are guidelines only. If you’re unsure about anything, contact us at KYB with questions!

Happy Tax Day!

Topics: Blog