File storage applications and services are a convenience to customers and a way to attract new prospects, but how long should you or your clients keep certain documents and why bother saving records anyway?
What Does the IRS Say?
In “How long should I keep records?” Small business owners and the self-employed are told in general the guideline is three years. Of course there are exceptions:
- 7 years if you file a claim for worthless securities or bad debt deduction.
- 6 years if you do not report income you should report and if it is more than 25% of the gross income shown on your return.
- Indefinitely if you don’t file a return.
- Indefinitely if you file a fraudulent return. (We’ll deal with you later.)
- Indefinitely or as long as you own the property (real estate), plus the period of limitations after the property has been sold.
- On nontaxable exchanges, you must retain records on the old property plus the new one until you sell the property and the period of limitations expires.
- 4 years for employment tax records counting from the due date or paid date, whichever is later.
What’s the Logic for Keeping Good Records and Holding onto Them?
A major reason small businesses incorporate is the corporate veil that provides a degree of protection from personal liability. The corporate veil may be pierced under certain circumstances.
- Not having formal, legal separation between the company and its owners.
- Not following corporate formalities like conducting an annual meeting and recording significant business decisions in corporate minutes of the meeting.
- Engaging in illegal activities or acting dishonestly.
Undercapitalization and complete control by a minority of individuals are also reasons, although that’s not relevant to the record keeping discussion.