How long to keep tax records for your business

Receipts, bank statements and payroll reports pile up quickly. At some point every owner asks the same question: how long do I actually have to keep all of this?

This guide walks through the IRS retention periods and the situations that call for keeping records longer. It is general information, not advice for your situation.

What is the general IRS rule?

The IRS ties record retention to the period of limitations, which is the window during which it can assess additional tax or you can claim a refund. For most returns, that window is 3 years from the date you filed.

A return filed early is treated as filed on its due date. If you file a claim for credit or refund after filing, the period is generally 3 years from filing or 2 years from when you paid the tax, whichever is later.

When do you need to keep records longer?

Some situations extend the period. If you left out income that is more than 25% of the gross income shown on your return, the period is 6 years. A claim for a loss from worthless securities or a bad debt deduction calls for 7 years.

If you did not file a return, or filed a fraudulent one, there is no time limit, so keep the records indefinitely. Employment tax records should be kept for at least 4 years after the tax becomes due or is paid, whichever is later. Our guide on payroll tax basics for employers covers the filings those records support.

Which records should you keep?

Keep anything that supports an item of income, a deduction or a credit on your return:

• Sales records, invoices and deposit records
• Receipts, canceled checks and credit card statements for expenses
• Bank and brokerage statements
• Payroll records, Forms W-2, W-4 and 1099
• Records of asset purchases, improvements, depreciation and sales

Records related to property follow their own clock. Keep them until the period of limitations expires for the year you sell or otherwise dispose of the property, since you need them to figure gain, loss and depreciation.

How should you store records electronically?

Electronic records are acceptable to the IRS if they are accurate, complete and legible, and you can produce them when asked. Scanned receipts and accounting software exports work well when they are organized by year and category.

Plan for backups and for changes in software. If you switch accounting systems, export and archive prior years so you can still open them later. Clean, consistent records also make month-end work easier, which is part of what we handle in bookkeeping.

What happens to records when you close a business?

Closing a business does not end the retention period. The final returns can still be examined, so keep the supporting records for the full period that applies to them.

Decide in writing who will hold the books and where they will be stored after closing. The closing a business checklist covers the other steps in that process. Before you destroy anything, check current IRS guidance and talk with your CPA about any open issues.