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Spring Cleaning for Your Tax Records

You’ve finished your tax return for the year, but your work isn’t done. It’s time to put those records away and begin to focus on keeping track of tax-related activities for this year. While recordkeeping may not be the most exciting part of being a business owner, it’s a vital one to ensure that you don’t overpay your taxes and are prepared for any IRS questions that may come your way.

For small businesses, you can get your tax organization tools at the same place you purchase your office supplies – Staples. From folders to file boxes, their Staples Brand Products line offers the tools you need to keep organized during (and after tax season) at a price that fits your budget.

What to keep

As a small business owner you’re required to keep books and records. How you do this is up to you. It can be done on paper with a journal or ledger, or you can use software or a cloud accounting solution. These books and records track your business income and expenses, and help you see whether your business is making or losing money.

In addition to an accounting system, you need to retain supporting evidence of the income you report and the expenses you deduct on your tax return. This paperwork includes:

  • Canceled checks
  • Paid invoices and receipts
  • Expense account statements or other records for travel and entertainment costs
  • Acknowledgments from charities to which you made contributions of $250 or more

You can keep paper receipts or create an electronic record as long as you can’t alter the electronic record after you create it. When you toss records, be sure to shred anything containing your tax identification number or other personal information about you or employees.

How long to keep

Keep your accounting records indefinitely. You want them not only because you must maintain them for tax purposes, but because of sound business reasons. You’ll want to track how your business is doing and may need to provide old financial statements generated from accounting records if you apply for commercial loans or when you sell your business.

As you clean out old tax records (other than accounting records) that you no longer need, don’t toss anything for the period in which the IRS can audit you. Keep tax records for a minimum of:

  • 3 years for income tax returns. Technically this means 3 years from the due date of the return, or 3 years from filing the return if after the due date. However, if you omit more than 25% of your gross income, the IRS has 6 years to audit the return. Keep the return and supporting documents.
  • 4 years for employment tax returns. Keep the returns and supporting documents (e.g., time slips, W-2s, valuations of in-kind wages, details on fringe benefits).
  • Forever for the copy of the return itself, along with proof that you filed it. If the IRS thinks you did not file a return, it has an unlimited time to audit you. However, once the time in which the IRS can audit if you filed a return has passed, you only need the return itself, plus proof of filing; you no longer need supporting documentation.

Other paperwork should be kept even longer. For example, you’ll want to retain documents related to the purchase of property for as long as you own it so you can compute your tax basis when you sell. Then you’ll add the documents to your tax records for the year of the sale. Also keep track of tax carryovers to which you may be entitled so you don’t overlook them in the future. These include carryovers for net operating losses, capital losses, home office deductions, investment interest, passive activity losses, and more.

Tools for recordkeeping efficiency

Staples 40 Quart Plastic Container, Clear with Locking LidBenjamin Franklin said “For every minute spent organizing, an hour is earned.” Invest some time in organizing your tax records — past and present.  I’ve partnered with Staples to help you organize your tax records and workspace so you can have at your fingertips what you need while staying under budget.

Just to give you some idea of the Staples Brand products that are most useful to you in this regard, consider the Staples® File Box, Letter/Legal size to store tax paperwork, such as old bank statements, receipts, travel expense reports, and paid invoices. Label the box for the return you’ve just completed “2015 taxes” using Staples Duramark Permanent Markers and store the box for the period described earlier.

Final thought

Looking ahead, it’s very helpful to create business policies and procedures for recordkeeping so that this activity becomes second nature to you and your staff. Look at IRS Publication 583  for more tips on tax recordkeeping. Stock up on supplies from Staples that can help you remain organized throughout the year so that next tax time, you’ll be prepared!

This post was created in partnership with Staples. All opinions expressed in the post are my own and not those of Staples.