How long you should retain business documents is a question that a lot of business owners ask. But another questions is, “Why is it important to hold on to this information for so long? Here are three benefits for retaining copies of your tax returns and financial documents.
Clear the clutter. There is nothing like being able to go into your storage area and actually having a clear path to walk through. It saves you time when you need to find information quickly. However, most people think in terms of physical space but the ability to locate files on your hard drive is prime real estate, too. If you want to keep the piles of paper and computer files to a minimum then knowing when it is safe to discard your business documents is a must.
Audit Preparedness. When it comes to income tax filing one issue that tax payers should understand is the statute of limitations. This is the period of time that the IRS can go back and pull your tax return for review. If they find errors or have cause to question the information that you report, they can recalculate and adjust the taxes that you owe. Keeping copies of your tax return and the supporting documents allows you to respond to their requests for information in a timely manner. It also helps you recall what was on the return and why you included the amounts.
Tax Planning. Contrary to popular belief, after you submit your income tax return that should not be the last time that you review it. These business documents are important for helping you map out a strategy to keep more of your business profits and cash flow. Tax returns are a good source of information that reveals how well you are making money work for you. Since income tax is one of the largest costs that you will, it is wise to seek ways to create tax breaks for your company.
Now that you know the benefits of retaining financial records here is a practical way to tame the paper tiger. Instead of allowing hard copies of tax returns and supporting documents take control of your file cabinet or storage area, consider using electronic storage. Scan copies and save them to a CD or flash drive. This not only saves you space but it also saves you time by being able to store multiple years on one disk for easy retrieval when you need them.