What You Need to Know About Your Professional Financial Records


Financial Records For Your Business

There's no end to the information available about how long you should keep your financial records: one year, 3 years, 7 years … why is there such a wide range?

It's a loaded question and there’s a reason why it’s not a simple answer – because it all depends.

Financial Records

Traditional Record Retention

The IRS has a concise document that outlines these times frames and they all depend on one factor: how honest you are.

Typically speaking, you need to keep your tax records for 3 years after the date you file your tax return or you receive a refund from your tax return. That’s a general rule of thumb that applies to most things.

There are some caveats, for instance, if you're:

  • Claiming losses on your tax return, then you’re required to keep your records seven years from the date you file your tax return.
  • If you don’t file a tax return, you should keep your records indefinitely because the IRS can choose to audit you 10+ years later if you don’t file.
  • Also, keep your records indefinitely if you file a fraudulent tax return. If there’s any possibility that you have not been up-front on your tax return, the IRS can audit you indefinitely. You need to be pretty honest with yourself here. Is there income you didn’t report? Are there expenses that you over-estimated or could have?
  • Additionally, there is such thing as gross negligence, which the IRS sees as similar to fraud. You may have not intentionally filed something wrong, but if you didn't take proper measures to ensure that you did file everything, that’s what they call gross negligent, and they can audit you for years to come if something ever comes up.

Overall, seven years is a good rule of thumb for keeping your financial records, including all receipts, filed fax forms, contracts, payroll stubs … etc.

Seven years … s.e.v.e.n. That's a long time! Can you remember what you or your business was like seven years or, or even what it will be like seven years from now?

The simple truth of the matter is if you have an easy financial system and documentation process that’s not difficult to maintain, keeping at least seven years of records is not difficult at all.

Until now, what’s made keeping long-term financial records so labor-intensive is that you had to keep actual papers – I have file cabinets and boxes full of paperwork in my near 20 years serving as a CPA.

Now that we're in the digital age, you don't need to purge your records at all, but you do need to create and maintain a plan for keeping detailed records.

The Why of Organizing Your Records

Many of us don’t keep records at all or we make a veiled attempt to keep records, all the while not understanding why we're keeping those financial records.

This is where your mindset is just as important as your process. You're working to become a financial ninja and a document warrior. Your bank statements are not sufficient documentation to prove a purchase and its purpose.

Retaining records isn't just about bulletproofing your business against big brother (aka the IRS) – insurance companies, creditors, and banks can audit you too. When you apply for a loan or open business accounts, you'll be asked for detailed financial records. With a solid system in place, a few clicks of the keyboard will give them all the info they need (and more!).

If they ask you for a balance sheet and/or a profit & loss statement, you'll be ready. Even if you don't know what those things are, your handy-dandy financial system will be able to generate those for you with a few clicks. You're creating an impression for the person that’s lending you money that you’re obviously very serious about your business, you’re keeping your records organized, and they can trust that the information you’re providing to them is accurate.

This is the key part in your business where you don't skimp or skip over.

With a detailed, easy-to-use online software like Xero – and backing up your documentation to places like Hubdoc or Receipt Bank – having a solid financial foundation is simpler than ever.

Being on top of your financial game isn't just a form of insurance against the IRS or a compliance issue with the law (though most of those are important), this information is for you.

Keeping detailed, long-term financial records is what a serious business owner does. The moment you decide to “try out” having your own business, you're in business.

By using a seamless, mobile system like Xero, suddenly your entire accounting system is easily accessible for those non-accountant types of rockstar clients we serve at The Bottom Line. It’s Xero's whole vision, their whole mission.

Once you can get over your mental stigma of, “Wow, I’m in an accounting system and this is intimidating,” you'll find that you can manage your business finances in just a few hours each month.

Still overwhelmed? If you can’t do it by yourself, connect with someone who can encourage you to feel safe to go through that process with you, like an accountant or a financial mentor.

The key here isn't about how long should I keep records for – focus on what financial system can you put in place that you can get the most out of the process with the least amount of time possible; a system that's easily organized, sorted, and searchable.

The Bottom Line

This is the ultimate definition of, “you’ve got to spend money to make money.” This will help you keep track of your money and keep your business protected.

Your accounting system is the thing that helps you keep your money, and that’s the whole reason you’re working: to earn a living and create a legacy and do all these wonderful things that you’re putting at-risk by ignoring this part of the process.

You could literally lose your entire business because you didn’t create a solid, easily-updated financial system and process. Other than having solid legal contracts, this is the way to make sure your business will always be yours.

Let the professionals at The Bottom Line CPA help you with your financial records.