When you’re running a small business, you have myriad things to worry about on a daily basis, so keeping detailed records may be the last thing on your mind. The IRS, however, requires that you maintain key records for specific lengths of time. It’s crucial to hang onto records that reflect your income and deductions in case your business is audited, and also to protect yourself and your business against any legal or insurance issues.
Let’s review some of the business records that the IRS may request, how long to keep each one, and why these records are so important.
- Maintaining accurate records is necessary to support your business in the event of an IRS audit, legal issues, or a growth event that might require a closer look at your business financials.
- Generally, you must keep records for three years after the due date of the tax filing. Employee records must be kept for four years.
- In the case of fraud or a substantial error in reporting, the IRS can audit up to six years, and in some cases seven, after the tax filing, and it may collect taxes for up to 10 years.
- Each state has its own period of limitations, so it’s best to double-check before disposing of any records.
What Business Records Should You Keep?
Businesses of all sizes are required to keep up-to-date records that reflect their gross income, expenses, deductions, and transactions. It’s best to maintain your records with the help of an experienced bookkeeper and electronic accounting software. Another great resource is your business bank account, which shows your income and transactions. Banks vary in terms of how long they allow you to access online statements, so it’s a good idea to download your statements each year.
The IRS accepts electronic records in audits, so you can make a digital copy of most records to reduce paper clutter.
Some examples of business records you should keep include:
- Tax returns: Any business tax returns, as well as the documents and correspondence used to prepare them.
- Employee records: All employee documents, including W-2s and HR records that show any benefits paid.
- Receipts: All receipts that show deductible business expenses, which can include meals and travel. There are some exceptions to recordkeeping requirements, such as if the expense was less than $75 or the receipt has been misplaced.The IRS can still request documentation of these expenses, so it’s best to use a receipt tracking app to document your smaller expenses.
- Bills: All documents that show the payee, the service rendered, the amount paid, and the date of payment.
- Insurance documents: All records of your policies for all years you’ve been in business, as well as paperwork related to any claims or losses.
- Loan documents: Documents that show the lender, amounts, terms, collateral, and all other information pertaining to a loan.
- Incorporation documents: Though they’re not necessary for preparing tax documents, it’s a good idea to keep all partnership agreements, incorporation documents, and your Employer Identification Number (EIN), as well as any licenses and/or permits in their original form.
How Long Do You Have To Keep Business Records?
The time allotted for you to amend your taxes to claim a deduction or request a return is called the period of limitations, and it generally lasts three years from the date of tax filing. During this time, the IRS can also request information to assess additional tax or examine any fraudulent activity. If you filed your taxes early for a particular year, the three-year clock starts on the tax due date.
In some cases, the IRS can audit your business after the three-year mark. If you don’t report more than 25% of your gross income, you must keep records for six years. If you claim deductions from worthless securities or bad debt, you need to hang onto records for seven years. If you decide not to file a return, you must keep your records indefinitely. And the IRS also notes that you should keep your business records indefinitely if you file a fraudulent return.
Each state also has its own period of limitations. While most follow the federal three- and six-year timeline, some have longer timelines. It’s best to check your state’s rules and maintain records for the longest required amount of time.
The IRS can write to you within the period of limitations to ask for a review extension far beyond the three-year mark, and if additional tax is assessed, the agency has 10 years (or sometimes more) to collect. To be extra safe, it’s best to digitize as many records as you can and keep them for at least seven years, and in some cases, indefinitely.
Why Is It Important To Keep These Records?
The main reason to maintain business records is for tax and auditing purposes. Ensuring that your reporting and deductions are accurate will make it easier to prepare your taxes each year, and maintaining the other records stipulated by the IRS will allow you to resolve any audits smoothly and accurately.
Your business records can also come in handy in many other instances. Insurance claims can be filed years after an incident, so maintaining those records can offer protection. Likewise, these records can help support your business in case of any legal issues. Business records are also important for future lenders and investors, who will want to see accurate records when deciding whether or not to invest in your business.
As a general rule of thumb, if you’re wondering if a document is important, it’s a good idea to keep it and/or make a digital copy for your records. It could protect you down the line.
Frequently Asked Questions (FAQs)
How long do you have to keep business records if the business closes?
Closing a business includes many steps, such as canceling licenses and permits, and sometimes transferring ownership. In addition to following the standard period of limitations for documents like tax returns and employee files, it’s a good idea to maintain all records that pertain to the actual closing or selling for three to seven years—or, to be safe, indefinitely. It’s always best to consult with your accountant during a business transition.
How long do you have to keep non-financial records for a business?
The IRS timelines aren’t the only ones to consider. Your insurance company may require you to keep records for longer periods in case of a claim, and some creditors may require you to keep loan documents indefinitely. Maintain documents until you’ve confirmed any requirements with your creditors and insurers.