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Table of Contents
- Why should you keep business records?
- How long to keep business tax records?
- When does the statute of limitations begin?
- Statute of limitations exceptions
- What types of business tax records do you need to keep?
- How to start keeping records
- What to do when the statute of limitations is up
- Other key business records to keep
One part of being a business owner means keeping records for everything, including what you’ve earned, what you've spent and where you’ve traveled. It can become easy to get swamped in paperwork, and you may be tempted to toss your records once your business taxes are filed.
The IRS requires that you hang onto those records for years. This guide will walk through how long you need to keep certain records and what you need to keep, so you’ll be prepared if the IRS comes asking for your records.
Why should you keep business records?
The IRS requires you to keep records that support the income you received and the deductions that you take. So if you claim a deduction for a training course or a client lunch, the IRS wants you to keep the details of that — you may be asked about them at a later date.
Aside from the IRS requiring you to maintain business records, there’s a business case to do so as well. Keeping good records ensures that you have accurate financial statements and that you can assess how your business is doing at any time. Keeping track of your records means that you claim all expenses that you’re allowed — helping to reduce how much you have to pay at tax time.
How long to keep business tax records?
In general, the IRS requires businesses to keep records until the period of limitations, or statute of limitations, runs out. The period of limitations is the amount of time that you have to make changes to your previous tax return or which the IRS can assess more tax.
The minimum period of limitations is three years, but in some cases, it may be longer. Plan to hold onto your tax returns and records for at least three years, and check the period of limitations before you decide to toss anything.
You should also note that if you need to amend your tax return, there is a time limit on that as well. If you’re filing for additional credit or a refund, the time limit is the later of three years from the date you filed the original return or two years from the date you paid the tax.
When does the statute of limitations begin?
The clock starts ticking on the three-year (or longer) statute of limitations on the later of the tax return due date or the date you filed your taxes.
If the tax return due date was April 15 and you filed Feb. 15, your timer begins on April 15. If you filed late without an extension on May 3, the timer would begin on May 3.
Statute of limitations exceptions
Most of your tax returns and supporting records — like receipts, bank statements, 1099-MISC and anything else that supports your income and deductions — need to be kept for three years. There are a few exceptions to the three-year period of limitations:
How Long to Keep It
Tax returns and supporting records, like receipts
Employment tax records
If you didn’t report income that you should have and it’s more than 25% of your gross income shown on return
If you file a claim for worthless securities or bad debt deduction
Employment tax records
If you have employees, all employment tax records should be kept for four years. That includes:
Your employee identification number (EIN).
Amount of wage, annuity and pension payments, including in-kind wages.
Amount of any tips received.
Employees’ personal information, including names, addresses, Social Security numbers and occupation.
Employee W-2s that are undeliverable.
Details of employment including dates employed and dates of paid absences.
Copies of employees’ income tax withholding allowance.
Details of tax deposits made.
Copies of tax returns filed.
If you didn’t report income when you should have, you’ll want to hold onto your records for six years. The IRS rule says that if the income you omitted is 25% or more of the gross income shown on your return, you’ll need to keep your tax returns and records for six years.
Worthless securities or bad debt deduction
Claimed a deduction for worthless securities or bad debt? You’ll want to hold onto those records for seven years.
Fraudulent return or no return filed
You’ll be hanging onto those records indefinitely, as there is no statute of limitations. The IRS can come looking for your records anytime in the future.
What types of business tax records do you need to keep?
The IRS isn’t specific about exactly how you need to keep your records. But when looking at what to keep, the IRS wants you to keep supporting documents for anything that you report on your income taxes. Some examples include:
Cash register tapes.
Receipt books and deposit information.
Invoices sent and received.
Forms 1099-MISC received.
Costs of raw materials or products purchased for resale.
Credit card receipts and statements.
Canceled checks that identify the payee, amount and proof of payment.
Petty cash slips for small cash payments.
All employee records.
Previous tax returns.
Keep in mind, this is not an exhaustive list. If there is anything else that is on your tax return — either income or a deduction — you’ll want to keep any records that support it.
Remember, the burden of proof for everything on your tax return is on you. It’s your responsibility to be able to prove the expenses that you deduct with adequate records.
What is adequate evidence?
In general, receipts, canceled checks and bills will be enough to document your expenses. These documents should help you establish the date, place, amount and reason for the expense.
For example, evidence for your hotel stay should include the name and location of the hotel, the dates you stayed and the cost of the stay, with separate charges for things like meals and telephone calls.
If you are keeping evidence for a meal, you’ll want to have a receipt that shows the name and location of the restaurant, the number of people served, the date of the meal and the cost.
Along with all documentation, you should also make note of the written explanation of the business purpose. Yes, the IRS wants to be sure that the lunch you had with clients had a business purpose and wasn’t just for fun — so make note of why it was important to have that meal.
Do you have to keep evidence for everything?
Thankfully, no. If you have an expense that is less than $75, you don’t need to have a receipt to support it. You also don’t need to keep documentation if it’s for a transportation expense and documentation isn’t easy to get. And if you have meals and lodging expenses that you report under an accountable plan for a per-diem allowance, you won’t need to keep your receipts.
It’s still a good idea to hold onto backup documentation if you can because if you do get audited, the IRS will probably want more info.
How to start keeping records
When you start your business, you should set up a business checking account. For most businesses, this is going to be the primary source for information related to your income and expenses. Each transaction in your business bank account should have more evidence to support it.
For example, when you pay for a client lunch, your bank account will show the payment for the lunch. You’ll then also want to keep supporting documents in your records that show the date, cost, attendees and business reason for the meal.
Keeping your business and personal information separate gives you a good start in organizing your business records.
Do you have to keep paper records?
There’s no need to keep piles of paper or shoeboxes of receipts lying around. You can use an electronic record-keeping system to keep things organized. Whatever record-keeping system you choose — electronic or not — it needs to clearly show your gross income as well as your deductions and credits.
What to do when the statute of limitations is up
As tempting as it may be to toss everything once the IRS says you don’t need to keep it, you might want to think twice. You might need to keep your records for other reasons. Your insurance company or creditors may require that you hold onto things for a little longer.
One of the benefits of keeping electronic records is that you don’t have to store piles of receipts in a filing cabinet. Archive your old records so that you can access them years into the future, anytime you need.
Other key business records to keep
While you’re keeping things for the IRS, don’t forget about keeping other records that are required for your business.
If you have employees, you’ll want to get a clear understanding of what documentation related to hiring you need to keep. In many cases, you may need to keep a hiring file with details of the job listing and applicant information. Where your company is located and its size will determine exactly what you’ll need to keep and for how long. For example, if your company is subject to the Age Discrimination in Employment Act (ADEA), you’ll need to keep information on applicants for one year.
There are also key business documents that you’ll want to keep indefinitely. Hang onto your company formation documents like articles of incorporation or articles of organization. You’ll also want to keep titles, shareholder meeting minutes, permits and licenses, insurance documents and any contracts.
Keeping organized records in both your business and personal life is important. When it comes to keeping records: If you’re ever in doubt, don’t throw it out.
A version of this article was first published on Fundera, a subsidiary of NerdWallet