Tax season is long gone. But the paperwork you used to figure your
business taxes seems to last forever.
Tax-related documents can overwhelm even the most prolific pack rat.
Year after year, the tax forms, schedules and receipts pile up in
folders and boxes.
How long you must hang on to those records depends on the statue of
limitations. That’s the time during which the IRS may assess additional
tax.
The statue of limitations differs for specific taxable events. The
checklist below will give you some guidance. You might also want to
consult IRS Publication 583, “Starting a Business and Keeping Records.”
It offers a thorough discussion about the statute of limitations. You
can download the publication at
www.irs.gov/pub/irs-pdf/p583.pdf.
7-point
checklist for stashing your tax records:
1. Tax
returns
Keep ‘em forever, recommends Eva Rosenberg, an enrolled agent and
author of the Web site
TaxMama.com.
“If the IRS or any tax agency comes back to you decades from now
claiming you never filed a return for that year, you can drag out
that crumbling, yellowing mess and fax it to them,” she writes on
her Web site.
For personal tax returns, keep all 1040 forms and accompanying tax
schedules. If you’re a sole proprietor, that means hang on to
Schedule C.
Corporations and other business entities should also keep business
tax returns indefinitely.
2. Income documentation
As a general rule, documents that support your income should be kept
for six years. The reason is simple. If the IRS suspects that you
underreported your income by 25 percent or more, the agency’s
examiners can come calling up to six years later.
Examples of income documentation include 1099 miscellaneous income
statements and W-2s.
Business owners should also keep invoices, receipts provided to
customers and bank deposit receipts.
3. Expense documentation
From the day you actually file your tax return, the IRS has three
years to initiate an audit. But if the agency believes you filed a
fraudulent return, the audit time extends to seven years.
So err on the side of safety. Documentation that supports your
tax-deductible business expenses should be kept for seven years.
Here are some examples of the expense records you should keep:
4. Home
office documentation
If you take the home office deduction on your taxes, you need to
maintain those tax records for at least seven years.
Even if you sell the home where your office was located, don’t ditch
the records associated with the property. Keep them for seven years.
These records will show expenses for repairs, utilities, mortgage
interest, insurance and other costs that went into calculating your
home office deduction.
5. Other business records
Some business records should stay with you forever. Articles of
incorporation, shareholder minutes and company bylaws should never
be thrown out. The same goes for documents covering trademarks,
copyrights and patents.
If you have employees, keep personnel records and related employment
information for as long as you operate your business.
6. Retirement plan
documentation
Financial statements from your retirement plans keep track of your
contributions and your earnings. They also show whether the earnings
are taxable or tax-deferred.
When it’s finally time to pay taxes on your retirement earnings,
these records will help you sort it all out for the IRS. So keep
these records for as long as you own the account.
7. Brokerage account
statements
Brokerage statements track the buying and selling of stocks, mutual
funds and other financial instruments.
Keep the statements for as long as you own the holdings in the
account. Even after you sell holdings in the account, keep the
statement for another seven years in case you need to verify income
for the IRS.
(Posted July 2004)
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