How Long Should I Keep My Business Tax Records?
Running a business comes with plenty of paperwork. Tax returns, receipts, bank statements, payroll records, and other documents can pile up quickly, leaving you wondering what you actually need to save and for how long. Keeping the right business tax records can make filing future returns easier and, more importantly, help you substantiate income, expenses, deductions, and credits if the IRS has questions about a return. Although three years is a useful rule of thumb, some business records should be kept much longer.
Key Takeaways
Three years is the general rule. In most situations, businesses should keep tax records and supporting documentation for at least three years after filing the applicable return.
Some records require longer retention. Employment tax records generally need to be kept for at least four years, while certain situations involving omitted income or bad debts can extend the recommended retention period to six or seven years.
Good organization matters. Whether you keep paper or electronic records, your system should clearly document your business’s income, expenses, and other information reported on its tax returns.
How Long Should I Keep My Business Tax Records?
How long you should keep business tax records depends on what the document relates to and the tax situation it supports. Generally, the IRS says records supporting income, deductions, or credits should be kept until the applicable period of limitations for the tax return expires. For many businesses, that means at least three years.
However, three years isn’t a universal deadline for every document. Certain circumstances can extend the period to four, six, or seven years – and some records may need to be retained even longer. Records related to business property, for example, generally should be kept until the limitations period expires for the tax year in which you dispose of the property.
Here’s a closer look at some common business tax records and how long you may need to keep them.
Past Tax Returns: At Least 3 Years
As a general rule, keep copies of filed tax returns for at least three years. The IRS specifically recommends retaining copies of filed returns because they can help when preparing future returns or calculating amounts for an amended return.
Consider keeping the return along with the records used to prepare it, including applicable tax forms, schedules, and other supporting documents.
Keep in mind that longer timelines apply in certain circumstances. If a return wasn’t filed or a fraudulent return was filed, for example, the IRS lists the retention period as indefinite.
Financial Records & Receipts: Generally 3 Years
Financial records that support information reported on your tax return should generally be retained for at least three years. These records can help establish your business’s income and substantiate deductible expenses.
Depending on your business, supporting records may include:
- Bank and credit card statements
- Sales records and cash register receipts
- Vendor invoices
- Purchase receipts
- Canceled checks or other proof of payment
- Accounting and bookkeeping records
- Expense reports
- Contracts and other documents supporting transactions
The IRS doesn’t require every business to use the same recordkeeping system, but your records should clearly reflect your business’s income and expenses. In some cases, multiple supporting documents may be needed to fully substantiate an expense.
Records involving business assets are an important exception. Documents establishing an asset’s purchase price, improvements, depreciation, business use, and eventual sale may need to be retained throughout the time you own the asset and after its disposal, until the applicable limitations period expires.
Employment Tax Records: At Least 4 Years
If your business has employees, you’ll generally need to keep employment tax records longer than ordinary supporting documents. The IRS requires businesses to keep employment tax records for at least four years after the tax becomes due or is paid, whichever is later.
These records can include documentation related to employee wages, tax withholding, employer tax contributions, and employment tax returns. Keeping complete payroll and employment tax records can also help your business respond to questions about amounts previously reported to the IRS.
Omitted Income: 6 Years
The standard three-year period can become considerably longer when income isn’t reported.
If your business fails to report income that should have been included on its return and that amount is more than 25% of the gross income shown on the return, the IRS says records should be kept for six years.
This is one reason businesses should maintain organized documentation of revenue from all sources, including invoices, sales reports, bank deposits, payment processor records, and applicable tax forms.
Bad Debts: 7 Years
If you file a claim for a loss involving a bad debt deduction or worthless securities, keep the related records for seven years.
For a bad debt, retain documents that help establish the original obligation and support why the amount became uncollectible. Depending on the circumstances, that might include contracts, invoices, account statements, correspondence, and records of collection efforts.
Items That May Not Need a Receipt
Not every business expense necessarily requires a physical receipt, but that doesn’t mean you can skip recordkeeping altogether. Under IRS substantiation rules for certain travel and transportation expenses, documentary evidence generally isn’t required for an expense under $75. This also applies to transportation expenses when a receipt isn’t readily available. Certain expenses covered by qualifying per diem arrangements may also be exceptions. Even when a receipt isn’t required, you should maintain a timely record. Include information such as the amount, date, business purpose, and other details needed to substantiate the expense. Lodging generally requires documentary evidence regardless of the amount.
Tips for Safely Storing Business Tax Records
Keeping business tax records isn’t only about how long you save them. You also need a system that makes documents secure and easy to locate when you need them.
Consider these recordkeeping practices:
- Create a consistent filing system. Organize records by tax year and category, such as income, payroll, expenses, assets, and tax filings.
- Digitize paper documents. Scanning receipts and other paperwork can reduce physical clutter and make individual records easier to find.
- Back up important files. Don’t rely on a single computer or storage device for critical business records. Maintain a secure backup in case your primary records are lost or damaged.
- Protect sensitive information. Tax and financial records can contain Social Security numbers, Employer Identification Numbers (EINs), banking information, and other sensitive data. Use secure storage and appropriate access controls.
- Keep asset records separately. Property and asset documentation may need to be kept substantially longer than ordinary expense receipts. Separating these records can help prevent accidental disposal.
- Dispose of old records securely. Once you’re certain records are no longer required for tax or other business purposes, securely destroy documents containing sensitive information. Do not simply throw them away.
Final Thoughts
Before getting rid of records, remember that IRS retention requirements aren’t necessarily the only rules that matter. Insurance companies, creditors, state tax authorities, or other parties may require certain documents to be kept longer. The IRS recommends checking for those additional requirements before discarding records that are no longer needed for federal tax purposes.
Keeping business tax records organized may feel like another item on an already long to-do list, but a reliable recordkeeping system can save time when tax season arrives and help ensure you have the documentation you need if questions arise later.