The IRS recently reminded every self-storage facility and business about
the importance of records, especially the importance of safeguarding tax
records against natural disasters. Good records can also help a
self-storage professional monitor the progress of the business, prepare
financial statements, and attract partners/investors when seeking financing or
selling the business.
Our Federal income tax laws require only that
a business keep “complete and accurate records,” but what records a self-storage
facility or business needs, what records it should retain, and for how long, is
Taxing Tax Records
Although the IRS suggests that tax-related
records be retained until the “period of limitations” expires for that year’s
return, it makes a great deal of sense to keep a copy of the self-storage
facility’s tax returns permanently. According to the IRS, the
period of limitation is the time period from the filing date until the date
which a return can be amended or the IRS can legitimately pursue the business
for additional taxes.
Typically, the IRS can come after a business for failing to
report income for up to six years after filing if the amount is greater than 25
percent of the operation’s gross income. If a deduction was claimed for a bad
debt or worthless security, the IRS recommends retaining supporting tax records
for seven years.
A business with employees should retain all employment tax
records for a minimum of four years according to the IRS. Employment tax
recrods include such things as employer identification number, amounts and
dates of wage payments and tax deposits, as well as the names, addresses,
social security numbers, dates of employment, and occupations of employees.
If business property is involved, the IRS suggests retaining
records until the period of limitations ends for the tax year when the property
was discarded. These records will aid in calculating depreciation, amortization,
or depletion deductions, and for determining any gain or loss resulting from
the sale or other disposition of that property. If the business property
involves real estate or a vehicle, the deed or vehicle title should be kept in
a safe, secure spot until sold or otherwise discarded.
When The IRS Wants To Know
When it comes to taxes, the reason most often
given by an IRS auditor when denying a tax deduction claimed by a self-storage business
or its owner/operator is not because it is not allowed but because the amount
of the deduction cannot be substantiated. Although the government is reportedly
reducing the need to keep records of income, adequate documentation substantiating
deductions is still extremely important.
To document expenditures, ideally every self-storage
business should have a canceled check and an invoice marked “paid” for any item
purchased. A canceled check without an invoice or other document showing the
item purchased could be a problem. Fortunately, with few checks being returned
by banks, the IRS will accept check images.
While an invoice is usually required to show
what was purchased, statements from a supplier may be substituted, but only if
they show the item. Best advice: Save all invoices; don’t assume the IRS will
accept a check written without an accompanying invoice.
What about payments to independent
contractors? Even for small purchases, the self-storage facility or business
should have an invoice. What’s more, the independent contractor should receive
a Form 1099-MISC, Miscellaneous Income. Without a Form 1099, the deduction
could be lost, and the business fined.
While there is no requirement to keep
receipts for any expense of less than $75, it remains necessary to record all
information about the expense: how much, to whom payment was made, type of
expense, the date paid, etc. Another good strategy: Keep a record of every
deposit made to all bank accounts. Record all money coming in, whether taxable
or not. At a minimum, note in the check register the source of each amount
Recordkeeping In Our Electronic Age
As more and more facility owners are turning
to their computers to keep track of financial matters, the IRS continues to
expand programs for electronic filing of tax returns. Taxpayers with assets of
$10 million or more at the end of their tax year are required to comply with
the retention requirements for “machine sensible records.” A machine sensible
record is data in an electronic format intended for use by a computer.
Fortunately, a self-storage facility or
business with assets of less than $10 million must comply with the record
retention requirements for machine sensible records in only a few rare
situations. While document retention is easier to manage electronically, it is
still subject to the same retention rules. Of course, records should only be
kept for as long as they are relevant, which, as mentioned, may mean six years for
Not too surprisingly, there are exceptions to
this general rule, such as tax returns that generate net operating or other
types of losses, credits that may be carried forward for many years, tax audit
records, and property basis records. These may need to be retained for longer
The self-storage operation’s financial
statements generally have a shorter period of relevancy than tax returns, and
there are few hard and fast rules for these. Retention should be dictated by
the business’ situation; records involving employee benefit plans, brokerage
statements, and actuarial reports should be maintained permanently.
Holding Onto Records
Generally, canceled checks and other
documents should be held for three years. Technically, it is three years from
the date the tax return was filed. If the IRS suspects that income was
underreported, they can go back six years. If it believes fraud is present,
there is no time limit. Ideally, using a seven-year holding period for most
records should be considered.
Obviously, no record should be disposed of
simply because it is no longer needed for tax purposes. Those records should be
retained until the self-storage professional checks to see if they must be kept
longer for other purposes. Insurance companies and creditors, for example, may
require some records to be kept longer than the IRS.
As mentioned, the IRS continues to warn
everyone to safeguard themselves against natural disasters by keeping a set of
backup records in a safe place. Naturally, the backup should be stored away
from the original set of records.
Keeping a backup set of records (including bank
statements, tax returns, insurance policies, etc.), is far easier today, with
many financial institutions providing statements and documents electronically
and much financial information being readily available on the internet. Even if
records exist only on paper, they can be scanned into an electronic format.
With documents in electronic form, the facility
owner can download them to a backup storage device, such as an external hard
drive, or burn them to a CD or DVD. In fact, the IRS encourages saving scanned
records to the cloud or other storage devices.
Making Up Lost Records
Reconstructing records after a disaster, any
disaster, may be essential for tax purposes or getting federal assistance or
insurance reimbursement. After a disaster, a facility might need certain
records to prove a loss. The more accurately the loss is estimated, the more
loan and grant money may be available.
Fortunately, the IRS allows its examiners to
make some exceptions to the recordkeeping rules. Among other things, they are
authorized to waive the recordkeeping requirements and accept “reasonable
reconstruction” when, according to the IRS administrative guidelines, records
were lost “due to circumstances beyond the taxpayer’s control, such as
destruction by fire, flood, earthquake, or other casualty. Naturally, whether
an event was beyond a facility owner’s control depends on the particular
circumstances. The courts may also allow deductions without records.
A Beneficial Headache
knows the IRS has the authority to compute the income of any self-storage
business with inadequate or no books or records. The methods used by the IRS
for reconstructing income vary depending on the facts and circumstances, but
are rarely favorable to the errant taxpayer.
Records and recordkeeping can take a variety
of forms and shapes. Remember, however, records are not only about making the
IRS happy. They also play an important role in managing the self-storage
Consulting with an attorney or tax professional can help guide a facility owner to a legal and tax compliant recordkeeping policy. In order to avoid identity theft and to protect sensitive business information, all business records should be disposed of properly or shredded.
Making Up For Lost Records
Should disaster strike, the IRS has
specialists trained to handle disaster-related issues (Phone: 866-562-5227). Back
copies of previously filed tax returns can be requested by filing Form 4506,
Request for Copy of Tax Return. While the IRS and the courts do occasionally
accept unsubstantiated estimates of expenses, tax deductions, insurance claims,
and disaster reimbursements are far easier with documentation.
For a self-storage business that has lost some or all of their records during a disaster, here are several helpful tips:
Create a list of lost inventories; copies of invoices can be obtained from suppliers.
Check mobile phones or other cameras for pictures and videos taken of buildings, equipment, and inventory.
*For information about income, make copies of bank statements. The deposits should closely reflect sales for any given time period.
Copies of last year’s federal, state, and local tax returns, including sales tax reports, payroll tax returns, and business licenses obtained from the city or county will reflect gross sales for a given time period.
If the self-storage business was pre-existing, the broker should have a copy of the purchase agreement.
Suppliers and equipment dealers can provide copies of invoices.
Bottom-line: Nothing beats the actual records and documentation for reconstructing, proving, and reminding the business’ owners or managers of deductions, credits, and income that might otherwise be overlooked.
Mark E. Battersby is a freelance writer, columnist, author, and lecturer based in Philadelphia, Pennsylvania.