How Long Should You Keep Documents?

The Internal Revenue Service (IRS) requires businesses to maintain careful records to verify their income and expenses. That means that if you claim business purchases as tax deductions, the IRS expects you to keep records to validate those expenses. 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. You know that good record keeping is part of running a small business, but you aren’t sure how long to keep business records and documents.

You need to keep the certificates to document claimed nontaxable sales. If you do not keep these records, you are liable for the tax, including penalty and interest, if you cannot otherwise prove a sale was not subject to tax. You must keep sales and use tax records for four years unless CDTFA gives written authorization for their earlier destruction. This applies to all records that pertain to transactions involving sales or use tax liability. Remember, to keep a backup of all digitized records in a secure second location, like a password-protected hard drive, or a secondary cloud storage service. Creating a digitized version of your essential records is a great way to avoid accidentally tossing small scraps of paper during spring cleaning.

Small businesses

If you do receive an audit notice, you will need to gather all of the tax records and relevant financial information that you do have access to. Now that you know why archiving your financial records is important, and how long you should keep your business tax records, let’s take a closer look at the types of records to keep. Let’s take a deeper look at the different kinds of tax records and how long you should keep business records to ensure your company is protected in the event of an audit. IRS accepts digital copies of tax records and documentation, but they have to be identical to the original receipts and records. However, this does not mean that you can discard the hard copy of the tax record because IRS can always ask for the printed original document at any point.

Remember, as a 1099 contractor running a business; you will have to bear the burden of proof. Meaning you will be obligated to produce all tax return documentation. Therefore, the most effective way to do this is to establish a mechanism to maintain records and know how long to keep tax records for the business.

You may need to prove that an employee worked for you the number of hours they claimed. There’s no way to know, so your best bet is to ensure you have any payroll or tax documents that you might be asked for on hand. Keep employee records for seven years after the employee leaves the company. The employee I-9 form should be kept three years after hire or one year after termination.

It’s important to separate your business and personal receipts and your taxable and nontaxable income. Reliable record keeping allows businesses to prepare financial statements that help business owners keep tabs on their expenses. However, many companies aren’t sure how long tax records and receipts need to be saved in the era of paperless transactions and cloud-based systems.

Gross receipts

Many businesses aren’t sure how long records must be saved in the paperless era. Record-keeping is a boring, but important business activity, and if you make the wrong choices, you risk litigation, succession planning problems and the wrath of the tax man. Understanding How long should you keep business records will help you avoid these problems.

In the digital world, recordkeeping is simpler—and takes a lot less physical space! The IRS has determined that electronic records are the same as paper originals. In some cases, electronic is preferred, since paper receipts can fade and become illegible over time. But, if you’d prefer to store all your files digitally, feel free to do so.

Other key business records to keep

As a business owner, you likely have in storage various documents, such as tax returns, personnel records and bank statements. Unfortunately, there isn’t a steadfast retention rule that applies to all kinds of records, meaning you need to categorize your files and create a document retention policy (DRP). Keep business income tax returns and supporting documents for at least seven years from the tax year of the return. The IRS can audit your return and you can amend your return to claim additional credits for a period that varies from three to seven years from the date you first filed.

• But, if you’d prefer to store all your files digitally, feel free to do so.
• Not only can you file for an amended tax return via these records, but these can also help you prepare your future tax returns.
• If you have employees, the IRS recommends that you keep all employment tax records for at least four years from the time you paid the taxes or filed the return (whichever is later).
• Any business deduction on your tax return can be investigated during an audit, so it’s best to have all the documentation on hand if you’re planning on claiming a tax deduction.
• If you’re still not sure about which small receipts to keep, you can review the IRS guidelines on proving expenses under $75 here.

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.

Why Do I Need to Keep Business Tax Records?

As a business owner or a manager, you probably have storage to keep various documents, such as employee records, timesheets, invoices and bills, tax returns, or bank statements. As a general rule, you should keep business tax records for a minimum of 3 years—in accordance with the IRS’ Period of Limitations rule. You should keep your return and business tax records for 3 years from the date you filed the original return or 2 years after you paid your taxes on that return, whichever one is later. But keep in mind, in other tax situations, such as not claiming income you should have, or not filing a return—you may be required to keep your records for longer. 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.

The most important reason to keep detailed records is for audits. You never know when the Internal Revenue Service (IRS) might come. Hopefully, this will never happen to you but if it does and you aren’t prepared, you could be in trouble.

Digital documents

As a business owner, you probably store tax returns, employee data and bank statements. Seemingly no one knows how long documents must be kept in the digital era. This leaves executives with the unsettling feeling that their company’s survival could rest on properly executing this tedious chore. After all, choosing an incorrect record-keeping method has the possibility of leading to litigation, succession planning issues or even a tax audit. Knowing how long to maintain company documents, tax returns and other papers can therefore restore your peace of mind. The IRS has established some basic record-keeping criteria for tax paperwork.

This tax establishes your eligibility for social security and medicare benefits when you retire or are disabled. The amount of benefits you receive is related to how much you earned. Keep in mind you may need to keep the original versions of some documents.

We believe everyone should be able to make financial decisions with confidence. We know every form you need and every deduction you can take to pay less this year. Most importantly, if any future discrepancies arise, the IRS can ask for any of these records during a tax year. Jesus Morales is an Enrolled Agent and has 7 years of bookkeeping and tax experience. Improve your business credit history through tradeline reporting, know your borrowing power from your credit details, and access the best funding – only at Nav. Your business assets are the property and equipment you use for your business.

Businesses or their accountants then record the accounting effects of transactions and file the supporting records based on the type of transaction and when it occurred. A business record is any document that records a business dealing. The amount of time you need to hold on to business records depends on the type of business you are operating. There are some common suggestions for how long you need to keep your business records. When stored, you should make sure to classify them based on their accessibility requirements.

If you do experience this situation, it is important to immediately document the disaster by filing an insurance claim detailing the damage. Similarly, you can also file for disaster assistance through FEMA or the Small Business Administration. The IRS will need accurate estimates of the loss in order to approve disaster-related deductions and to help with loan and grant money cases.

In case you lost a receipt for such expense, you will have to inform IRS what the expense was for, the amount, when, and where you spent it. Having these organized and easily accessible will make applying for financing easy and fast. If you have employees, keep 1099 or W-2 forms for four years. Be sure to check with your state and local tax bodies to make sure you understand all related rules or regulations. Earn your share while providing your clients with a solid service. Accept payments from anywhere—at your brick-and-mortar store, on your website, or even from a mobile phone or tablet.

Be aware that you now house sensitive information like Social Security numbers, and should take measures to protect that data. Failure to maintain accurate records may be considered evidence of negligence or intent to evade the tax and could result in penalties. 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. Is a West Des Moines, Iowa law firm providing legal services to business entities, rural electric and telephone cooperative associations and individuals. Below are some of the records and timelines for retaining those records as advised by the IRS.

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 might have a question about business expenses on your income tax return, so you’ll want to be able to prove the purchase was business-related. This will also come in handy if you claim a deduction or depreciation for equipment. It’s recommended that you hang on to your accounting records for seven years. Some accountants suggest keeping things like financial statements, profit and loss statements, and audit reports indefinitely.