Owners of small and home-based businesses have a lot of issues to keep up with, and one of the ones that’s surrounded by confusion is the issue of keeping old financial records, especially receipts.
Some people swear by keeping each and every receipt.
Others consider the never-ending and always-expanding file of paperwork to be more a burden than a help when dealing with finances.
In this post, we’ll break down the basic facts for keeping your receipts and other major records.
Private persons …
If you don’t have a business, the bar is set fairly low on keeping receipts for routine expenses. Keeping copious archives of your transactions can help in special situations, such as launching a plan to consolidate your debts or reduce credit card debt. Beyond these scenarios, though, there are a few times that keeping receipts can help enormously.
Major expenses for home or car: Receipts reflecting major repair or renovation work should be kept with your tax records on a long-term basis, as they can help establish the value of your major assets and assist you in selling them.
Warranties, returns, and exchanges: It often happens that the one thing you would never expect to break down … breaks down. Lost, stolen, or damaged items might also be covered by particularly good warranties. You can’t take advantage of these benefits if you don’t have receipts. It’s the same story with returns and exchanges, which have gotten stricter as large retail chains confront the issue of loss.
Reimbursements: You may have work-related bills that your employer offers compensation for. If so, you’ll have to surrender the original receipt, so make a copy; with big companies, reimbursements can take a long time and can be lost in the system for quite a while before you see the money.
Tax deductions: It goes without saying that if you plan to benefit from tax deductions, you have to have adequate proof that you qualify. This often means receipts pertaining to the expense under consideration. Deduction eligibility can change, so consult an independent financial advisor before getting rid of anything you think you might need.
Businesses should plan to keep each and every receipt, just as you would keep invoices and other records that establish the scope of your activities. Your potential for tax deduction is huge compared to “John Q. Public”, and your likelihood of extended contact with the IRS is also higher than average. If you ever have to deal with an audit or any other kind of regulatory inquiry, receipts can only help you.
Generally, you should plan to keep records for seven or nine years; this represents the maximum amount of time the IRS might wish to look at, and the statute of limitations for most audits excluding suspicion of fraud. Assume the best and prepare for the worst – simple mistakes can mean you really do need records from nearly a decade ago.
What Other Records Should I Keep?
There are many kinds of records that might be important to your finances. Bank statements, insurance policies, and mutual fund statements should be held for at least three years. Notes, contracts, and leases should be held for seven years, and likewise for accident claims. This is true even if policies expire, contracts become void, and so on.
What do you need to hang on to for at least a year? Bank reconciliations, brokerage statements, pay stubs, and credit card statements fit the bill here. If you’re up to the challenge, keeping “anything and everything” can help with budgeting and debt management. We’ll explain how to use this strategy to your advantage later.