As a business owner, keeping track of your financial records is crucial to the success of your business. However, it can be difficult to know how long to keep these records. On one hand, you don’t want to throw away important documents too soon and risk legal or financial consequences. On the other hand, holding onto unnecessary paperwork can take up valuable space and resources. In this article, we will discuss how long is too long to keep financial records for your business and provide some guidance on what documents should be kept and for how long.
Keeping financial records is an essential part of running a successful business. It allows you to track your income and expenses, stay on top of your taxes, and make informed financial decisions. However, many business owners struggle with determining how long they should keep their financial records. While keeping records for too short a time can be risky, holding onto them for too long can also be a waste of resources. In this article, we’ll explore how long is too long to keep your business’s financial records.
Why Do You Need to Keep Financial Records?
Before we dive into how long you should keep your financial records, let’s first understand why you need to keep them in the first place. There are three primary reasons why you need to keep financial records:
1. Tax Purposes: The IRS requires businesses to keep financial records for a minimum of three years from the date of filing the tax return. However, if you don’t file a tax return or if you file a fraudulent return, the IRS can audit you at any time.
2. Legal Purposes: Financial records can be used as evidence in legal disputes, such as lawsuits, insurance claims, or audits.
3. Business Purposes: Financial records help you track the financial health of your business, make informed financial decisions, and secure financing from investors or lenders.
How Long Should You Keep Financial Records?
Now that you understand why you need to keep financial records, let’s explore how long you should keep them. The answer depends on the type of record and the purpose for which you’re keeping it.
1. Tax Records: As mentioned earlier, the IRS requires businesses to keep tax records for a minimum of three years from the date of filing the tax return. However, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep the records for seven years.
2. Payroll Records: The Fair Labor Standards Act requires businesses to keep payroll records for at least three years. However, the IRS recommends that businesses keep them for at least four years.
3. Bank Statements: Banks typically keep records of your transactions for five to seven years. However, you should keep your own copies of bank statements for at least seven years for tax and legal purposes.
4. Contracts: Keep contracts and agreements for as long as they’re in effect, plus at least seven years after they expire.
5. Insurance Records: Keep insurance policies and claims for as long as the policy is in effect, plus at least seven years after it expires.
6. Other Financial Records: Keep other financial records, such as invoices, receipts, and cancelled checks, for at least seven years for tax and legal purposes.
In conclusion, keeping financial records is essential for running a successful business. However, it’s important to know how long to keep them to avoid wasting resources and risking legal and tax issues. While the minimum required time to keep records is three years, it’s recommended that you keep them for at least seven years for tax and legal purposes. By following these guidelines, you can ensure that your financial records are accurate, up-to-date, and readily available when you need them.