Did you know that some business records should be kept for up to seven years? Others must be kept indefinitely if you don't file a return. As a small-business owner, you not only have to keep certain records but also find a way to organize them efficiently. Good business record keeping can make tax time easier, identify deductible expenses and avoid hefty fines.

Importance of Business Record Keeping

A new small-business owner may get his business registered, flip over the open sign and have customers from day one. However, if there are no systems in place to keep track of his earnings and ongoing expenses, he may end up paying thousands in fines and penalties. At the very least, you should maintain accurate records of your business transactions and make sure your books show your gross income, deductions, purchases, assets and employment taxes on financial statements.

A good record-keeping system and records management will not only help you avoid getting fined but also drive business growth. Your business records provide valuable insights that you can use to identify hidden costs, monitor your company's performance and develop new strategies. These documents provide the information you need to make financial forecasts, track customers' orders and improve employee efficiency.

As the IRS notes, the type of records you must keep for federal tax purposes depends on your business. These may include gross receipts, invoices, canceled checks, account statements and documents for purchases, such as credit-card receipts. To stay on the safe side, consider storing your business records in the cloud and maintain both electronic and hard-copy formats. This way, you will still be able to access them in the event of a data breach, fire or theft.

Financial Records and Tax Returns

As a rule of thumb, keep all major financial records and tax returns. These documents are an important part of your financial history and can save you a lot of trouble in the long run.

According to the IRS, small-business owners should keep their tax returns for three years from the date they filed them or two years from the date of payment, whichever is later. However, you may need to keep them for longer or indefinitely in certain circumstances, such as when filing a claim for bad-debt reduction or filing fraudulent returns. Employment tax records should be kept for at least four years.

The three-year rule only applies when you actually file a tax return and have proof that you did it. For example, if the IRS doesn't have a copy of your tax return, you may need to prove that you filed it. Therefore, it makes sense to keep your business records for longer than three years. Additionally, the IRS may check any tax returns you filed over the last six years if more than 25% of your income doesn't appear on the tax return.

Business-Ownership Records

Certain documents, such as business-ownership records, must be kept indefinitely. Make both electric and hard copies of your articles of organization (for LLCs) and other key documents, including contracts, business licenses and permits, property records and more.

Electronic records hold the same value as paper originals from a legal perspective. Store your business-ownership records in the cloud as well as a hard drive or USB stick so you can access them anytime. Paper documents can get lost or become ineligible over time, so it's recommended to keep electronic copies as well.

The same goes for partnership agreements and any contracts you have with your customers or vendors. Make electronic copies and store them in a folder indefinitely. Lenders and investors, for example, may want to see these documents to make sure your business is legitimate.

Documentation for Expenses

Whether you're self-employed or running a small business, you'll likely have expenses that can be deducted from your gross income. Legal and accounting services, office supplies, rent, utilities and business-travel expenses are just a few. If you don't keep the receipts, you won't be able to claim these expenses on your tax return.

There's an exception, though. Travel, gift and transportation expenses below $75 don't require a receipt. However, you do need to keep records that include relevant details, such as the dates you left and returned for a business trip. To deduct your transportation expenses, keep records of each expense, date, and use of the car.

The legal requirements are even more complicated for corporations and businesses with employees. Depending on the industry, you may also need to keep records demonstrating your compliance with IT security regulations, workplace safety standards and more. These documents may come in handy when you least expect it, so don't take unnecessary risks. A complete set of records can save you time and money while ensuring legal compliance.