Organizing Your Record Collection

What to keep and what to toss? It's a question every business owner needs to answer before the taxman calls. Here are some tips

By Karen E. Klein

Q: After spending the past week cleaning out our old file-storage rooms, I have these questions: Which records could be discarded, which should be retained, and for how long? Is there a good source anywhere to get recommended guidelines for how long different documents and financial records should be kept? -- N.C. Indianapolis


Your best sources for that information are your attorneys and/or accountants. They will have the basic document retention rules in mind, and they should also be familiar with the specific legal or financial records that you ought to hang on to beyond the recommended time frame -- just in case.

Based on their professional input, develop a policy or system of records management for your company, experts advise, and then stick to it. If you don't have a system or policy, at least refrain from destroying records until you consult your attorney.

Keeping records is essentially a form of risk management, says James C. Counts II, a CPA based in Hemet, Calif. "Retaining them provides protection against possible future liability," he explains.


  Certain books and records are subject to quite detailed rules. Federal tax law, for instance, requires taxpayers to maintain account books and general records to support the amounts they have reported on tax returns for as long as they may be relevant to a claim for a tax credit or refund -- or to an IRS attempt to assess additional tax for the year in question.

Although the IRS normally has three years to audit a tax return once it is filed, experts generally recommend taking the conservative approach and keeping tax-relevant receipts and other documents for seven years. Actual tax returns and worksheets should be kept by your business permanently.

In other areas of business, the retention period is very situational, Counts says, which is why you would benefit from specific advice. Because of the potential for claims relating to environmental liability, real estate records should be kept indefinitely. Tax and legal correspondence, tax-audit closing agreements, audit reports, yearend financial statements, minute books of corporations, patents, trademark registrations, copyrights, and general ledger and journals should also be permanently retained and organized so that they can be located easily if the need arises.


  Some of the common documents you should keep for seven years, Counts says, are bank statements, deposit slips, sales records, accounts payable ledgers and schedules, accident reports and claims on settled cases, garnishments, payroll records, personnel records on terminated employees, inventories, invoices to customers and from suppliers, and business journals.

Documents commonly kept for no more than three years include bank statements, general or routine correspondence, employment applications, expired insurance policies, internal audit and miscellaneous reports, petty cash vouchers, and sales commission reports. Hang on to all documentation on assets for as long as you are depreciating them.

Check out the Web site of the IRS for government perspective and advice on small business record-keeping.

Have a question about running your business? Ask our small-business experts. Send us an e-mail at, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Before it's here, it's on the Bloomberg Terminal.