Find out when to store, digitize, or shred important financial documents
If you’ve ever tried to organize your filing cabinets (or your documents management system), you know how quickly the process can be derailed by the age-old question: “Should I keep this?” This question has high stakes for financial records. After all, businesses depend on accurate financial paperwork to prove compliance, so shredding or deleting an old set of contracts or a tax return from 2005 can feel especially nerve-wracking. So how long should you keep financial records? Can you simply destroy or delete them? If so, when? The answer varies by document type, recency, and necessity to your daily operations.
Financial records management can optimize work and protect against compliance lapses. Read this guide for how to pick and implement the right solution for you.
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Financial records retention requirements for businesses
There’s no one definite answer to the question: “How long should you keep financial records?” As a broad rule, the US Chamber of Commerce recommends keeping documents related to your business finances anywhere from three to seven years. That’s because the IRS generally does not conduct audits on tax returns filed past the seven-year mark.
However, most businesses have legal obligations to multiple government agencies, which means you’ll need to keep some financial records for much longer, or perhaps indefinitely. While this guide is intended to be a useful resource, it’s always best to talk to an attorney to understand your obligations around a particular document.
Some examples of financial records businesses need to keep include:
- Tax returns
- Invoices
- Expense reports
- Financial statements
- Contracts and statements of work
Publicly traded companies and companies in the financial, healthcare, or legal sectors have to comply with particularly stringent regulations when it comes to managing financial transactions. If you’re ever audited by the IRS, not being able to provide proof of income claimed on a tax return can lead to delays and penalties, and other regulatory bodies, such as the SEC may impose penalties for incorrect or misleading financial statements.
Did You Know?:While compliance obligations vary across industries, some best practices for document management are universal. We share a few of them in this article.
How long should you keep financial records?
Invoices, receipts, and expense reports
Keep paid invoices for at least three years as proof of income you claimed on your taxes. If your business is audited by the IRS, your auditor will usually ask for proof of income from the past three years. Receipts or expense reports submitted by employees which you deducted as business expenses on your tax return should also be kept for three years for the same reason. You need to be able to prove that the revenue and expenses your business claimed are real.
Keeping paid invoices around is also a good way to protect yourself from any potential client disputes about amounts owed. Once the three-year period passes, in most cases, you can safely destroy old invoices and receipts to free up space in your documents management system or filing cabinet.
Tax documents
The IRS recommends keeping three years' worth of tax returns, but if your business tax situation is more complicated, you may want to keep tax documents for closer to seven years. If you want to be extra diligent about it and you have space to spare in your cloud storage, it’s not a bad idea to keep tax returns indefinitely. While the IRS may not need to see them ever again, it can be valuable to see how much your business has evolved and become more complex over the years.
That being said, keeping paper copies of all your tax returns is perhaps not feasible — consider digitizing older copies and shredding the paper versions to save some space.
Financial statements and quarterly reports
The recommended time period for tax obligations is seven years, but since these documents have value beyond tax compliance it’s probably best to hold on to them as long as you have your business. Quarterly reports are also particularly helpful when you are applying for funding and want to demonstrate your company’s growth over time. Besides, having a look back at the financial ups and downs in your business through the years can give you some insights into underlying issues and help you plan for the future.
Contracts and statements of work
You should hold on to statements of work for the duration of your relationship with a client or vendor. If there are any disputes about scope or obligations, the statement of work is your solid foundation for negotiations. If you have adequate storage ability, you may want to hold on to contracts of work indefinitely since they can be a nice reference point should you ever rekindle a partnership with a client or vendor.
Did You Know?:Document management systems can automate and reduce the amount of admin work on your plate. Take a look at this list of document management systems for small businesses to learn how they work.
Financial record retention strategies
Digitizing any paper copies of financial records is the easiest way to store them securely with minimal inconvenience. If you prefer to hold on to physical copies for your peace of mind, you may do so for seven years and then simply shred them and retain the much more compact and cheaper-to-store digital copies indefinitely. Some other best practices you may want to consider include:
- Investing in a user-friendly and industry-appropriate document management system. Some DMS providers, like NetDocuments, which serves law firms, have tools and features that suit specific industries.
- Create a timeline for all your financial records. That way you won’t have to ask how long should you keep financial records every year. All documents you generate need to be filed with a sunset date or labeled as important enough to be kept indefinitely.
- Think about security and user permissions features. Your DMS should encrypt and protect your financial records and allow you to limit access to sensitive information to a set number of team members.
Our recommendation: fi-8040
Those in the market for a high-speed document scanner that can digitize financial records with ease have no shortage of options. We take great pride in having spent the last 50+ years researching, designing, and developing some of the most advanced and powerful electronics in the world, including our professional grade fi Series scanners.
Built to purpose for the most demanding document handling jobs, fi, and SP scanners are capable of processing tens of thousands of pages per day at the highest levels of accuracy. Their intuitive integration capabilities with all existing work suites minimize time-to-value for businesses looking to invest in tools that will pay dividends for years to come.
The fi-8040 is a perfect example of a compact desktop office scanner that can digitize receipts, invoices, and contracts with ease. It comes with an automatic feeder that intuitively corrects skews and is flexible enough to process plastic cards, making it an affordable and convenient choice for small businesses and solopreneurs. Click here to learn more or shop the rest of our production scanner line.
Note: Information and external links are provided for your convenience and for educational purposes only, and shall not be construed, or relied upon, as legal advice. PFU America, Inc. makes no representations about the contents, features, or specifications on such third-party sites, software, and/or offerings (collectively “Third-Party Offerings”) and shall not be responsible for any loss or damage that may arise from your use of such Third-Party Offerings. Please consult with a licensed attorney regarding your specific situation as regulations may be subject to change.
