There’s a lot to keep up with when you’re running your own business—inventory, payroll, business licenses, and of course, business tax records. But how long do you actually need to keep the paper trail going and the file cabinets overflowing? According to the IRS’ record retention policy, you should keep business tax records for 3-7 years depending on the type of record and when you filed your business tax return.
Why do you need to keep business records for so long after you’ve filed a tax return? For one, if the IRS decides to conduct an audit on your business, they’ll want to see documented proof of items like your business expenses, tax returns, claimed deductions, etc. If you don’t have this information archived and organized, your business could face major payment—even criminal—penalties.
Let’s take a deeper look at the different kinds of tax records and how long you should keep business records to ensure your company is protected in the event of an audit. Need answers fast? Use the links below to navigate to each topic.
- Why Do I Need to Keep Business Tax Records?
- How Long to Keep Business Tax Records
- Which Business Records Should I Keep?
- Record Keeping Tips for Your Business
- What If My Business is Audited Without the Proper Records?
- Spend Less Time Organizing Your Business Tax Records
Why Do I Need to Keep Business Tax Records?
Besides just being a precautionary measure in case of an IRS audit, there are many other reasons it’s important for your business to keep high-quality tax and financial records, including:
- Legal compliance
- Financial forecasting
- Business planning
- Tax preparation
How Long to Keep Business Tax Records
As a general rule, you should keep business tax records for a minimum of 3 years—in accordance with the IRS’ Period of Limitations rule. You should keep your return and business tax records for 3 years from the date you filed the original return or 2 years after you paid your taxes on that return, whichever one is later. But keep in mind, in other tax situations, such as not claiming income you should have, or not filing a return—you may be required to keep your records for longer.
Why three years?
According to the IRS small business page, there is a Period of Limitations rule that restricts the IRS auditing period to 3 years after filing a tax return, for the majority of tax situations. However, with most tax matters, there are some exceptions to the 3 year rule that would require your business to keep tax records for longer—or even indefinitely.
Exceptions to the three year rule
Before discarding any tax-related financial records, note these exceptions:
- If you did not report taxable income on a previous year’s return, and it is more than 25% of your gross income, keep records for 6 years after your filed your return—or the due date of that return (whichever is later).
- If you did not file a tax return, you should keep your business tax records indefinitely.
- If you filed a fraudulent or inaccurate return, you should keep business tax records indefinitely.
- If your business has employment tax duties, keep your employment tax records for at least 4 years after you paid taxes, or the date they were due (whichever is later).
Key Takeaway: If you’re not sure whether or not you need to keep a specific tax record or financial statement, just file it away for safekeeping. Or better yet, consult the help of a tax professional to help you weed through the unnecessary paperwork and identify exactly which documents you’ll need to hang on to—your crowded filing cabinets will thank you.
Which Business Records Should I Keep?
Now that you know why archiving your financial records is important, and how long you should keep your business tax records, let’s take a closer look at the types of records to keep.
Gross receipts dictate the total income your business has received over a given period of time—including revenue outside of normal business activity, such as income from interest, dividends, and tax returns. Some examples of gross receipt records include:
- Cash register tapes
- Deposit information
- Receipt books
- Form 1099-MISC
Purchases are essentially your business’ inventory—the items you buy and then sell back to your customers. This includes raw materials that may be used to produce the product you sell. Include these documents in your purchases category:
- Credit card statements
- Canceled checks with the payee, amount, and proof of payment
Expenses are costs other than purchases that your business may incur. Examples of business expenses may include rent and utility bills. File the following documents for your record of expenses.
- Canceled checks
- Account statements
- Petty cash slips
Travel & gift expenses
Travel and gift expenses can also include business transportation and entertainment costs. These expenses often require a bit more substantial documentation than other deductions, as the connection to business benefit can be less clear than other operational costs. Some examples of travel, transportation, entertainment, and gift expenses your business should keep include:
- Receipts with date, amount, and business purpose
- Mileage tracking if deducting vehicle operation costs
Assets refer to the property your business owns and uses in order to operate—this can include land, equipment, and furniture. Since the value of these items can depreciate over time, your documentation will need to reflect the rate of value gained or lost when the asset was sold. Your documentation for assets should contain the following details:
- Asset history
- Purchase date and price
- Asset use
- Selling date and price
- Purchase and sale invoices
Always keep receipts, bank statements, invoices, and documents that support a tax deduction, credit, or income that will appear on your tax return.
Employment tax records have their own set of rules to follow, so be sure to refer to the IRS Recordkeeping for Employers guide to ensure your business is in compliance. The following employment tax records should be kept for at least four years:
- Payroll records
- Tax records
The IRS isn’t always right—which is why keeping tax records is so important. Not keeping these types of records could end up putting your business in a complicated employment tax debt situation if the IRS does not believe you have paid your employment tax dues. If you find yourself in an employment tax debt problem, you may consult a professional for payroll tax relief to help you gather the right documentation for your business and employees.
You should keep your filed tax records from previous years in addition to business expenses and documents relevant to your future tax prep.
Your bank and credit card statements are key sources of information if your business is ever audited by the IRS. Plus, they give you helpful financial insight that can help you run your business better. Thankfully, most banks issue detailed online bank statements that make it easy for you to identify incoming and outgoing funds—which helps cut down on storage space and organizational headaches.
Phew! That’s a lot of records to handle, organize, and hold onto. But as you know now, the penalties of not properly recording your company’s financial data are far worse. If you’re unsure how to approach recordkeeping, consider hiring a bookkeeping expert to ensure all of your records are pristine and easily accessible in the event of an audit.
I threw away a receipt—can I still get a tax deduction?
Any business deduction on your tax return can be investigated during an audit, so it’s best to have all the documentation on hand if you’re planning on claiming a tax deduction. Without the proper documentation, the IRS could discredit a claimed deduction and you will be responsible for making up the balance if it ends up impacting your tax bill.
Note: If the expense is less than $75, and you are able to provide the expense amount, where and when the purchase was made, and the business purpose of the expense, the IRS may still accept your deduction.
Record Keeping Tips for Your Business
What’s the best way to save my business tax records?
You should keep multiple versions of your business tax records—including digital and paper copies. You can use a cloud-based storage system to help organize your financial records by year, as well as the analog metal filing cabinet or fire-safe boxes to keep your old school paper documents in order. The most important thing to note here is that you should have backups of your documents to ensure you have everything you need to support you in an audit—and help you run your business’ finances better in general!
How do I properly document receipts for deductions?
The IRS accepts both digital copies of receipts and original records, so long as they clearly show the correct corresponding details of your income and expenses. Depending on the type of receipt, you may need to record different details, especially if you plan to claim any deductions for the expense.
For example, if you’re claiming a deduction for a business meal, you will need to include the following information along with your receipts and records.
- Date and time the meal took place
- Purpose of the business meal
- A brief summary of the business discussion
- Names and occupations of the individuals at the business meal
Again, keep in mind that each type of deduction may require different or additional documentation, but in general, you should include the following details across all of your records:
- Receipt with date and amount
- Business purpose/benefit of the expense
What happens if my business tax records are destroyed in a disaster?
While it is best practice to keep multiple copies of your business tax records (such as digital and paper copies), accidents do happen. If your important documents are compromised in the wake of a disaster such as a flood, fire, or theft, you might not be able to provide the information you need to file upcoming deductions or to respond to an IRS audit.
If you do experience this situation, it is important to immediately document the disaster by filing an insurance claim detailing the damage. Similarly, you can also file for disaster assistance through FEMA or the Small Business Administration. This way, the IRS has proof that your business was affected by a disaster, signaling that you may not be able to provide certain documentation, or you may have suffered a loss that you could claim on your next tax return. The IRS will need accurate estimates of the loss in order to approve disaster-related deductions and to help with loan and grant money cases.
In addition to documenting the disaster by filing a claim and taking photographs of the damage, you should also request your tax return transcripts in the event you need them for an audit.
How long do I need to keep business records after closing?
At some point, you may want to close up shop and retire from small business ownership. Whether you’ve been in business only a few years or fifty, you’ve likely generated a lot of paperwork—from old tax returns to payroll records and maybe even pension statements. Depending on the type of record, you may need to keep it anywhere from 3 years to indefinitely after you’ve closed your business.
Business records such as worker’s compensation records, patents and trademarks, and business licenses should be kept for as long as possible. While things like old tax returns and records can be kept anywhere from 3-7 years, depending on the record type and the business’ filing situation.
Hint: the 3 year Period of Limitations applies here, too. Not sure if you’re safe to cleanse your collection of paperwork? Talk to a bookkeeping professional before getting rid of any important records you or any compliance agents (such as the IRS or insurance companies) may request later.
How do I properly dispose of business tax records?
After you’ve passed the 3-7 year threshold for keeping your business tax records, you may be ready to rid yourself of those piles of papers and send them off to the trash. But before you cleanse your office space of all of the extra paperwork, you will want to take the following two steps.
- Double check that anyone your business is associated with (your bank or insurance company, for example) is okay with you discarding the documents. They may need them for an outstanding claim or other matter, so it’s best to check in with them first.
- Dispose of your records properly by shredding them—instead of trashing or recycling. There’s a lot of personal and financial data on your old tax returns and other financial records, so do what you can to make sure your information is protected by disposing of your records responsibly.
What If My Business is Audited Without the Proper Records?
Small businesses are much more likely to trigger an IRS audit than the average taxpayer, so it’s important to make sure your business is always prepared in case of an audit. If you do receive an audit notice, you will need to gather all of the tax records and relevant financial information that you do have access to.
From there, you will need to go through the audit process. Many businesses choose to work with a tax relief solutions provider to minimize the impact of an audit and represent them before the IRS.
Spend Less Time Organizing Your Business Tax Records
Managing a small business is not a profession for the faint-of-heart. From long hours at the office to crunching numbers and identifying opportunities for growth, to say your schedule is swamped would be an understatement. It’s easy to get wrapped up in your list of to-do’s—but properly managing your business’ finance and tax records should be just as much of a priority as perfecting your craft, or training your employees.
The experts at Community Tax are here to help free up some time in your schedule for the stuff that’s really important to you and the longevity of your business. Spend more time growing profits, generating leads, and refining business operations, while our team of enrolled agents, CPAs, and bookkeeping experts help you archive your financial documents, prepare reports, run payroll, and more.
The best part? Our business resolution services always keep you in the loop, so you can be as hands-on or hands-off as you want, while your assigned team of tax professionals work on your account daily. Give us a call to start your free tax consultation.