Contractors generate a lot of paperwork, from bills of sale to contracts to payroll ledgers. Figuring out a way to store and organize financial records can be daunting, especially during tax season. However, even after yearly tax forms and annual financial statements have been submitted, contractors must also know what records need to be retained for both tax and non-tax purposes and for how long.
Why hold on to records
In addition to accurately filing your yearly taxes, there are other reasons to keep records. For instance, the Occupational Health and Safety Administration requires some types of medical records to be kept for 30 years. Alternatively, contractors working with the U.S. Department of Defense may have specific record retention obligations for security purposes. State and local governments can also enact retention regulations, such as requirements on keeping employee disability or benefits records.
“Failure to produce records needed for litigation could result in fines or incarceration.”
Additionally, law enforcement officials may need access to a contractor’s records in order to solve or prevent crime, or settle a legal dispute. If your records or data are summoned for litigation, you will be under a legal obligation to provide them in a timely manner. Depending on the situation, failure to produce the material could result in fines or incarceration if a court finds you are intentionally, recklessly or negligently withholding evidence.
Length of retention varies
The length of time a contractor should hold on to a record varies depending on the type of document and the specific nature of the contractor’s business. For example, according to the IRS, in general you should keep records relating to income, deduction or credit shown on your tax return until the period of limitations for that return expires.
However, that period will differ depending on the specifics of the return. In most instances, the IRS advises keeping your records for three years after the date you filed. However, if you claimed a loss from worthless securities or a bad debt deduction, the period of limitations will remain open longer. In this case, the IRS advises keeping records for seven years, but other specific instances come with different recommendations.
“It is not best practice to retain all records and data indefinitely.”
Non-tax-related records will also have great variance in retention length. For example, purchase orders, computer back-ups, routine correspondence and bank reconciliations should be kept for three years, while product inventory, vendor invoices, payroll records, and scrap and salvage records should be kept for seven years. Other documents such as canceled checks, tax returns, property appraisals or union agreements should be kept permanently. Insurers or creditors may also have specific retention requirements you must honor.
On the other hand, it is not best practice to retain all records and data indefinitely. For one, physical storage of paper records can be cumbersome and result in time-consuming or disorganized filing. While electronic records can typically suffice in the place of paper originals, the expense of high-volume digital storage can be prohibitive. In both cases, unnecessarily holding on to records can make it more difficult to find specific information. Additionally, some information such as employee health records may have legally set retention limits.
The importance of retention policies
Establishing a retention policy allows contractors to create a clear and comprehensive system for both archiving and destroying records. Such policies set pre-determined retention lengths for different types of documents or data and establish guidelines for destroying the information securely. These policies should also include steps for decrypting any encrypted information in the event it is needed for law enforcement use.
Retention policies must follow all applicable state, federal or international laws. If you are involved in any current litigation, you should also consult with an attorney and modify your retention policies accordingly.
In addition to legal requirements, retention policies should also reflect any contractual agreements the contractor has made with customers or suppliers in regards to their access to records. For larger companies, establishing a record retention policy may involve feedback from multiple departments including information technologies, legal and human resources.
Consulting with a certified public accountant allows contractors to craft retention policies that are in line with legal, contractual and regulatory obligations. A CPA can also provide specific retention records for each type of document, and advise on formulating a policy that balances cost of storage with business risk. For more information, please contact a member of the LaPorte Construction Industry Group.