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Paper Trail: A Guide for What to Save and What to Trash

Chances are you own at least one bursting-at-the-seams filing cabinet or a plastic bin filled with tax returns from the era when Vanilla Ice wasn’t a punch line. Or perhaps you’re a bit more on the modern side—your hard drive is literally brimming with scans and data dumps.

Worse, maybe you roll the dice and give little thought to saving your business’s documents.

Regardless of which camp you fall into, a couple central questions persist: How long does a business need to hang on to its business documents? And what should it keep?

Like so many of life’s questions, a black-and-white answer doesn’t exist. Internal Revenue Service rules have long served as the default, but there are other things businesses should take into consideration. Above all, though, small businesses need to have an explicit, executable plan.

“It’s very possible for small businesses to underestimate value of records and the need to retain them,” said Benjamin Wright, a Dallas-based attorney specializing in technology and documents.

To an extent, the IRS allows some flexibility in how businesses manage their documents, including the use of electronic systems.

“The IRS won’t tell you everything you need to do. You’ll need guidance from a CPA,” said Wright, who blogs extensively about document systems.

The IRS has, however, explained recently that it will accept electronic accounting systems, such as QuickBooks, for an audit.

IRS Publication 583 emphasizes that any document retention system should allow a taxpayer to easily support business results that appear on a tax return. For a long time, the retention rule of thumb held that businesses and individuals should keep tax returns and documents for seven years, but Publication 583 indicates that that’s not true. Rather, different statutes of limitation apply to different tax situations. For instance, if a business owes additional tax, the statute of limitations is three years.

The IRS offers examples of the best documents to retain:

  • Revenue: Cash register receipts, bank deposit slips, invoices, 1099s
  • Purchases and expenses: Canceled checks, credit card receipts, account statements

All things considered, seven years is not a bad standard, even if it is a little more than necessary in several situations. But note: There is no statute of limitations on fraudulent or unfiled tax returns.

Documents serve more divergent purposes than supporting tax returns. Wright mentioned as an example construction companies that might need to comply with special environmental laws. Other federal or state government agencies might stipulate that pertinent documents should be maintained indefinitely.

“Theoretically, you can have requirements that go beyond [the IRS requirements],” said Wright. “If so, you’ll probably know about it.”

Small businesses shouldn’t assume that a more sophisticated document retention plan requires sophisticated equipment and software. In fact, a solution might be right at your fingertips. Wright emphasizes e-mail as the simplest and easiest way to maintain supporting documentation. “We can use e-mail as the diary of what we did, who we talked to, how we did something. It can be very valuable,” Wright said. He noted that many major e-mail services offer unlimited storage for as low as $20 a year.

Given those circumstances, a small business could choose to store a lot of documents on an e-mail system, and record much of how it does business. With the price of hard drive and cloud storage plummeting, too, businesses now have many affordable options from which to choose.

Too much documentation can potentially be problematic, though. “We live in the electronic fishbowl,” said Wright. “That applies just as much to mom-and-pops as it does the U.S. Department of State. Electronic records can appear anywhere.” In other words, be careful.