Small businesses are required to keep certain kinds of records, especially if they are involved or may become involved in lawsuits. Corporate documents like minutes and memos can help document what happened at a later date. All small business owners should keep a copy of their tax returns and supporting documentation. Federal laws also require people who claim a loss on their IRC § 1244 stock and businesses which are subject to the Age Discrimination in Employment Act (ADEA) to keep specific records.
Preservation of corporate documents like minutes, notes, memos and drafts makes it possible to document intention at a later date. This can be important if, for example, a contractor raises a dispute over the terms of a contract. However, uncontrolled accumulation of documents can be disastrous in the event of a lawsuit. Diaries and memoranda may seem innocent to corporate managers, but can serve as a ''smoking gun'' in the hands of the lawyer for an opposing party. The best solution can be to destroy entire classes of files on a regular schedule to avoid an implication that they were selectively destroyed. Destruction should be halted if documents become relevant to a claim, lawsuit, or government investigation.
Tax Records Generally
Generally, small business owners should keep the federal tax returns and supporting documents until the statute of limitations expires, which is usually three years after the returns were filed or two years after the tax was paid. The statute of limitations is the time period allowed to the government for challenging or auditing the tax return, or to take other action against the taxpayer, such as imposing additional tax assessments or penalties. If the taxpayer understated his income by more than 25%, the statute of limitations extends to six years. If fraud was involved or no return was filed, the statute of limitations never expires.
Loss on § 1244 Stock
In order to encourage investors to provide private capital for small corporate ventures, the Internal Revenue Code (IRC) provides that individuals and members of partnerships that invest in such ventures are allowed ordinary loss treatment. This treatment under § 1244 is available only to individuals who are original issuees of qualifying stock and to qualifying members of partnerships.
A loss on § 1244 stock is treated as an ordinary loss no matter how it occurs. It is not limited to losses on sales or exchanges of the stock. If the stock becomes worthless, or if it is redeemed at a loss, the deduction is still an ordinary loss, even though it would otherwise have been a capital loss.
The corporation claiming status under § 1244 is required to keep certain records in support of its claim. A plan to issue pre-November 1978 stock must appear upon the records of the corporation. Any designation of post-November 1978 stock also must appear upon the records of the corporation.
The corporation claiming status under § 1244 may, but is not required to, keep other records. In order to substantiate an ordinary loss deduction claimed by its shareholders, the corporation should maintain records showing the following:
- The persons to whom stock was issued, the date of issuance to these persons, and a description of the amount and type of consideration received from each
- If the consideration received is property, the basis in the hands of the shareholder and the fair market value of the property when received by the corporation
- The amount of money and the basis in the hands of the corporation of other property received for its stock, as a contribution to capital, and as paid-in surplus
- Financial statements of the corporation, such as its income tax returns, that identify the source of the gross receipt of the corporation for the previous five taxable years
- Information relating to any tax-free stock dividend made with respect to § 1244 stock and any reorganization in which stock was exchanged for § 1244 stock
With respect to pre-November 1978 stock:
- Which certificates represent stock issued under the plan
- The amount of money and the basis in the hands of the corporation of other property received after June 30, 1958, and before the adoption of the plan, for its stock, as a contribution to capital, and as paid-in surplus, and
- The equity capital of the corporation on the date of adoption of the plan
An individual who claims an ordinary loss with respect to stock under § 1244 must have records sufficient to establish that the taxpayer is entitled to the loss and satisfies the requirements of § 1244.
Record-Keeping Requirements for the ADEA
The ADEA protects employees from age discrimination by their employers. The ADEA authorizes the Equal Employment Opportunity Commission (EEOC) to establish regulations requiring the following:
- Employers must make and retain for three years payroll or other records containing each employee's name, address, date of birth, occupation, rate of pay, and weekly compensation.
- Employers must keep for one year any personnel or employment records related to job applications, resumes, employment inquiries, failures or refusals to hire, promotions, demotions, transfers, selections for training, layoffs, recalls, discharges, job orders to employment agencies or labor organizations, applicant test papers, results of physical examinations, and advertisements or notices to the public, if the employer makes, obtains or uses any such records in the regular course of its business.
- Employers must also keep copies of employee benefit plans and merit or seniority systems for the full period that the plans or systems are in effect and for at least one year after their termination.
Once an enforcement lawsuit begins, an employer may be required to retain any relevant records until the final disposition of the action.
If you have any questions about what information your small business should keep, contact a small business lawyer in your area.
Questions for Your Attorney
- Do I have to keep my business's tax information for more than three years?
- What kind of records do I have to keep on my IRC § 1244 stock if I claim a loss on it?
- If my business gets sued for age discrimination, what kinds of records will we have to produce in the lawsuit?