As your small business grows, so will the number of records you need to keep. A business record could include a tax document, bank statement or employee performance review. Whatever the file, you need to know exactly how long to keep business records, and we have answers.
Record retention isn’t just another best practice. The IRS requires you to keep certain files for a certain amount of time. It also reduces your risk of major audits and legal problems.
Do you really have to hold onto a $20 Target receipt from years ago? Maybe…
We’ll go over which records you need to keep and how long you need to keep them. Then you can use our 5 tips to protect your business documents in the long term.
How long to keep business records
As a rule of thumb, the IRS instructs business owners to keep tax-related records for at least three years. Many documents have added requirements, which we’ll go over below.
The IRS isn’t the only organization with requirements on how long to keep business documents. Your creditor, lender or insurance company could also have related policies.
Finally, keep in mind your certified public accountant (CPA) or tax preparer may give you different recommendations. It’s a good idea to check with these professionals before throwing records away.
We sourced the following general guidelines from the IRS’s website. Here’s what you need to know.
Income tax returns and supporting documents
First, keep copies of your filed income tax returns indefinitely. Past returns can help you prepare your future tax returns. You’ll also have them handy if you need to file an amended return to make corrections later.
What about all the records used to support your tax return? You need to hold onto these supporting documents until the period of limitations expires. This is the time period during which you can still amend your tax return or the IRS can assess additional owed tax.
After this time period, you typically won’t need these documents for tax purposes. You can’t amend that tax return any longer and, in most cases, the IRS can’t audit it. (We’ll cover some exceptions below.)
The period of limitations for most small business tax returns is three years. For example, if you file a tax return in March 2020, keep supporting documents for that return until March 2023.
Keep copies of your filed income tax returns indefinitely.
“Supporting documents” is a big category. It includes any records related to business expenses, asset purchases, sales, payroll, investments and more. Here are some examples of supporting documents you may need to keep for at least three years:
- Cash register tapes
- Business receipts (for expenses over $75)
- Paid bills
- Purchase orders
- Expense reports
- Credit card receipts
- Financial statements
- Accounts receivable entries
- Accounts payable entries
- Bank account statements
- Canceled checks
- Deposit slips
Finally, there are some important exceptions to the three-year rule.
If you fail to report income on a return—and it’s more than 25% of your gross income—you need to keep your records for six years.
Didn’t file a tax return
If you didn’t file a tax return, you have to keep your business records indefinitely.
Maintain your records indefinitely if you ever file a fraudulent return.
Bad debt and worthless securities
Keep your business records for seven years if you deducted the cost of bad debt or worthless securities on your tax return.
If you’re not sure, keep it.
Employment tax records
Employment taxes include items like:
- Federal income tax
- Payroll tax, like Social Security and Medicare taxes
- Federal Unemployment tax
- State income tax
- Local income tax
Hold onto your employment tax records for at least four years after you file your tax return or your pay your taxes, whichever comes first. As an employer, protect your employer identification number (EIN) and related documents.
You also need to safely store employee records like worker contact information (address, Social Security number, birth date and more). Keep payroll records, tip reports, timesheets, dates of employment and employee benefits for at least four years.
It’s also recommended that you keep some human resources (HR) files even longer. For example, don’t throw away files like job applications, resumes or performance reviews for at least seven years after an employee “has left or been terminated.”
If you have a business record related to property, the IRS says to keep it “until the period of limitations expires for the year in which you dispose of the property.” In other words, keep property-related records until the IRS can’t audit that year’s tax return. Generally, that’s seven years after you file it.
You’ll also need this information to calculate deductions when you sell or dispose of the property.
Follow the golden rule for business records: If you’re not sure, keep it. Even if you no longer need certain files for tax purposes, the IRS recommends you hold onto them. As we mentioned earlier, creditors or benefits providers may require you to keep your records longer.
You may have signed contracts with additional guidelines. Additionally, your state or locality may even have rules around keeping old business permits, safety documents, employee records, annual reports and more.
You may need to keep some business records permanently.
5 tips for handling and protecting business records
You may have to hold onto some business records for as long as 10 years or even permanently. Use these tips to make sure you keep the correct documents, store them securely and dispose of them the right way.
1. Know your specific legal requirements
Your record-keeping requirements also depend on your business entity type. For instance, there are stricter rules for corporations than for sole proprietorships.
If your business is incorporated, you need to keep business finances and personal finances separate. Your business records need to be organized, clear and distinct to avoid audits. On the other hand, sole proprietors can mix both categories—and have to be extra careful to keep all relevant records.
Be sure to check with your state and local tax bodies to make sure you understand all related rules or regulations.
2. Track your expenses carefully
And by “carefully,” we mean “digitally.” Cloud technology has made it much easier to keep your business records in order. Use accounting software to save time on record-keeping and reconciliation. Update your books from anywhere with online tools like FreshBooks and Xero.
A receipt app is another big help to your business. You and your employees can snap a picture of paper receipts and send it straight to your accounting software. That way, transaction records can’t slip through the cracks. Many apps also create an IRS-accepted image you can use when it’s time to file taxes.
Read about tracking expenses for more helpful tips.
Cloud technology has made it much easier to keep your business records in order.
3. Watch out for trouble categories
- Vehicle, travel and meals: The IRS scrutinizes these categories closely. Be prepared to prove the who, when, where, why and how much of these purchases, whether you or your employees made them.
- The home office deduction: You’ll need clear-cut evidence you truly use your office space for business purposes only. Pictures of your office area will help build your case.
- Entertainment expenses: As of 2018, you can’t deduct entertainment purchases on your income tax return. So make sure you can prove you didn’t deduct the cost of evening show tickets along with a business dinner, for example.
4. Digitize your records
According to the IRS, your electronic records are just as official as your paper originals. There’s no excuse to have just one paper copy of any of your business records. Paper records fade over time and are vulnerable to fire damage and theft.
While you don’t have to go completely paperless, consider creating a digital version of your business records. With only an inexpensive scanner, you can create a back-up copy of important documents. Then, simply upload files to a cloud-based storage option like Dropbox, Google Drive or your business management software.
5. Shred anything you don’t keep
If you truly don’t need a business record anymore, shred it. This is essential to protect your business, your employees and your customers from identity theft. Otherwise, bad actors can fish in your recycling bin for Social Security numbers, addresses and credit card information.
Keep in mind you may need to keep the original versions of some documents. This includes things like your articles of organization, articles of incorporation, business permits, operating agreements and signed contracts.
If you truly don’t need a business record anymore, shred it.
Better safe than sorry
When it comes to how long to keep business records, it’s best to err on the side of caution. If the IRS ever comes knocking, you don’t want to stare down an audit because of a few missing receipts.
If you have more documents to hold onto than you thought, don’t worry. By digitizing your business records, you can cut down on clutter and stay organized. Regardless of the record-keeping system you choose, stay consistent with your method. That way, you can quickly and easily locate any record you need.
Finally, remember tax and business laws are complex and change often. However, you don’t have to go it alone. Check with your accountant or a tax professional before tossing any major records.
KEEP READING: The Best Small Business Tax Resources for 2020