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Record Keeping Basics – 10 Things You Need to Know Now!


A lot of the questions I receive are about how to organize and store business records and how long they should be retained.  I am a firm believer of keeping digital images instead of paper.  I started this in 2004, which now seems way ahead of my time.

I cannot take credit for having an overwhelming desire to be environmentally conscious or to have great technological foresight.  It simply came as a result of four hurricanes hitting South Florida.  It took hours to “prepare” my office for the hurricane that was on its way and a few more hours to get the office back in working condition after the storm had passed.  Even more important was that I realized that if my business was impacted by a hurricane, it was the water damage and not really the wind damage that would be most devastating. It was pretty easy to imagine the content of the bottom drawers of my file cabinets being totally destroyed by water damage.  This would amount to possibly as much as 40% of my client’s records being destroyed and unrecoverable.

What did I learn from Mother Nature?

  1. Scan, scan, scan. Businesses deal with so much paper. Scanning and digitally archiving files can be stored and accessed easily. It also has eliminated my storage space after a few years and reduced the amount of space I needed to lease for my business.  After you have scanned your data, invest in a high quality shredder or hire a shredding company – but make sure you witness all of the records being shred to safeguard confidential information.
  2. Consider using a web-based accounting program.  Many of these programs store the document along with the transaction in the software.  We are switching one client after another to the newer breed of accounting programs for this reason, accessibility, and reduction of costs associated with the bookkeeping function.
  3. Have a back-up plan. If you scan, make sure those records are in at least two places. If you scan to the cloud – make sure that your provider has a back up plan that includes storing the information in at least two different locations in different States.  If you are still storing records locally, I will be talking about taking you paperless in an upcoming newsletter.
  4. Ask about virus protection software. The best financial and backup system in the world is useless if it’s destroyed or compromised. Virus protection software can help safeguard your documents. Consult with a tech professional who can offer practical advice on the best software for your needs.  If you are using a cloud-based service, find out how they protect your data.
  5. Pay attention to the statute of limitations. These are not necessarily the same as those for personal tax returns. For most excise, income and payroll tax returns, the statute is three years after the due date of the return, or three years after the return was actually filed, whichever is later.  For forms 941. the statute is three years from April 15 of the year following the year for which the return was due or 3 years after the date the return was actually filed, whichever is later; the same language applies to forms 943, 944 and 945.Remember that not all tax forms are created the same. Employee benefits forms vary since the rules and deadlines themselves vary: generally, the statute is 3 years if the information is disclosed and six years if it is not disclosed on the form. Keep in mind that while the filing of the form 5330 (Excise Taxes Related to Employee Benefit Plan) generally starts the statute of limitations for excise taxes relating to benefits, that is not the case for section 4975 excise tax for prohibited transactions – the statute for those starts running with the filing of the form 5500 (annual report).
  6. Don’t get hung up on the statute of limitations. While you shouldn’t save absolutely everything, that doesn’t mean your documents should go to the shredder on the day that the statute of limitations for tax purposes has come and gone. Remember that there may be other issues – like employment and human relations – that have their own statute of limitations. Be sure that you review any legal requirements for retaining those files before tossing them. Ditto for career-specific rules like those that govern lawyers, accountants, doctors and the like: you may be subject to professional rules for retaining and/or disposing of client files.  For real estate records, the common rule of thumb is to hold them for at least as long as you have deferred or rolled over any gains.  Consult your real estate attorney for more guidance on this one!
  7. Train your employees. Develop a record retention policy.  Figure out which of your records should be saved ahead of time – that is, before the question comes up (remember to pay attention to those statute of limitations). What do you do with canceled checks? Credit card statements? Bank statements? Old tax forms? Payroll reports? Create a system and a schedule for shredding, filing and scanning, train your employees how to follow it and stick to it.  The key is to not wait until the last minute!
  8. Be flexible. While paying attention to a system is important, it’s also smart to revisit your plan on a regular basis to make sure that it still makes sense. Things change. Employees leave. Clients come and go. Businesses expand and shrink. Technology changes at breakneck speed. Tax laws and regulations – including employer reporting and payment obligations (think HealthCare Act, for example) – are constantly evolving. Pay attention to the details and don’t get stuck in a dangerous rut.
  9. Don’t be pound foolish. If you take away just one bit of information, keep this one in your pocket: hire professionals. Don’t leave the integrity of your tax and financial resources up to employees who might transition out of your company or convince yourself that you might get to taking care of the records yourself “some day.”
  10. Surround Yourself With a Professional Team – As a business owner, the two folks make sure you have a good tax professional and a payroll company. Payroll issues get more businesses into trouble than any other single tax issue I see with respect to corporate taxes. Payroll companies are not expensive and worth every penny – get a good one and use it.

Adopted from an article written by Kelly Phillips ERB Forbes 7/11/13

1 Comment

  1. All good concepts to follow – Have a Backup Plan and Train your Employees are 2 concepts that could probably be easily overlooked. Thank you.

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