Now that you’ve filed your return and have files stacked on your desk, you need to know how long to keep business tax records.
Diligent recordkeeping makes it easier for you and your business in the event of a lawsuit or audit, and tax records are valuable if you want to track past performance.
There will be situations where you’ll want to discard old files, so here are some guidelines for how long to keep business tax records.
Keep everything until the period of limitations expires
According to the Internal Revenue Service (IRS), business owners must keep records “that support an item of income, deduction or credit shown on [their] tax return until the period of limitations for that tax return runs out.”¹
The “period of limitations” is the IRS’s term for the time during which you can amend your tax return or the IRS can perform an audit. It’s safe to get rid of a record when the period of limitations expires, at least as far as the IRS is concerned.
Different kinds of documents have different periods of limitation. More on that below.
You’re unlikely to be audited, but it’s still essential to hold on to documents
Sole proprietors with $1 million or more in income have around a 5% chance of being audited. For businesses with $200K to $999K in income, that number drops to around 2%.
Though the vast majority of businesses will not be audited in any given year, it’s reasonable to be prepared because the tax bill for an IRS audit is big.²
Hold onto tax return documents for at least three years
The Internal Revenue Service (IRS) mandates that companies keep their tax return documents for at least three years from the filing date. However, I don’t recommend disposing of documents right at that three-year mark.
The IRS has the authority to investigate a company’s unreported revenue for up to seven years in certain situations if the company
- does not report income that should be reported;
- fails to report income that amounts to more than 25% of the gross income shown on its tax return;
- does not file a return; and
- files a fraudulent return.¹
So while you must keep tax returns for three years, consider staying safe and holding onto all documents that you used to file your tax return for seven years.
Keep employee tax records for four years
The IRS recommends that employee tax records include
- employees’ names, addresses, social security numbers, and dates of employment;
- wages, annuities, and pensions paid to employees;
- taxes withheld, like FICA and Medicare;
- records of tips and fringe benefits paid; and
- 1099s for independent contractors.
Maintain paper and digital versions of the documents that contain the information above.
Keep records of deductions for bad debt or worthless securities for seven years
The tax code allows you to deduct bad debt or worthless securities from your taxable income. These deductions won’t apply to every business, but you should still be aware of them.
A bad debt is a debt that was included in your gross income but was not repaid by the debtor and for which collection is unlikely.
Worthless securities are stocks, bonds, or other securities that have become entirely worthless, meaning cannot recoup your investment in the securities.
Keep records of both debt and securities deductions for at least seven years until the period of limitations expires.
A few records should be kept permanently
Examples of records that should be kept permanently include entity formation documents and ownership records like titles, deeds, and stock ledgers.
Corporations are required to keep shareholder meeting minutes. Failure to do so could cause the owners to lose liability protection, so consider maintaining records of your meeting minutes.
You should also permanently hold onto your Employer Identification Number (EIN) or Tax ID Number.
And a handful don’t need to be kept
If you have expenses less than $75 for transportation, lodging, or meals, you don’t always need a receipt. However, you need to be able to tell the IRS the expense details. I recommend keeping your receipts for seven years as a precautionary measure.
Electronic backups are a must
Here’s a tip: keep electronic backups of all your tax files. The extra work will be more than worth it if disaster strikes. Keep backups of your backups. Back up everything.
Don’t rely on your bank’s records. You want your files in your hands.
Let’s get your tax records in order
If you have a question about business tax records or another financial matter, schedule a discovery call with us today.
Jeremy A. Johnson, CPA
- How long should I keep records? 2023. Irs.gov. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records
- Penalties [Internet]. Irs.gov. Available from: https://www.irs.gov/payments/penalties