Every small business owner understands the need for careful documentation. Some documents even serve a legal purpose. For example, the IRS may ask to see these documents to validate your tax returns or deductions.
But how long should you hang on to all this paperwork? The answer varies, depending on whether you're talking about bank statements, tax records, or other kinds of business documents.
We've put together this guide to help you learn how long to keep business records to clear up any confusion. In it, we'll also explore the legal reasons for storing these records properly.
Saving your business tax records
For most small business owners, saving tax records is a high priority. You'll use these financial statements to report income and file your tax returns.
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. They may even ask to see these documents at a later date.
Which business tax records should I keep?
The IRS expects you to keep any supporting documentation related to income or expenses for your business. This will generally include items such as:
- Previous tax returns
- Credit card/cash receipts
- Cash register tapes
- Bank statements
- Credit card statements
- Accounting records
- Business contracts
- Canceled checks
- Petty cash slips for small cash payments
- W2 and 1099 forms
This list is hardly exhaustive. Some small businesses might also need to save additional contracts and reports for their own internal records, though the above list will be most important for filing your annual tax return.
What if I don't have a receipt?
You may already be aware that not all of your business expenses can be documented. The IRS allows you to deduct the following expenses without a receipt:
- Purchases less than $75
- Transportation expenses
- Lodging expenses
However, for tax purposes, you should still document these expenses in your accounting records and maintain them for the same three-year period as your other receipts and miscellaneous financial records.
How long do I need to save business tax records?
As a general rule, you'll want to keep your tax documents for at least three years. But in many cases, you'll need to save these documents for up to seven years.
The following outlines the time for saving specific documents:
- Past tax returns: 3 years
- Receipts: 3 years
- Other financial records: 3 years
- Employment tax records: 4 years
- If you omitted income from your tax return: 6 years
- If you omitted income for bad debt or worthless securities: 7 years
We'll cover the employment tax information in a moment, but it may be helpful to look at these other exceptions to the three-year rule.
According to the IRS, if you omitted more than 25% of the adjusted gross income shown on your return, you'll need to keep your business tax returns and supporting records for at least six years. Be advised, however, that the IRS can legally go back further if they also believe you to be guilty of fraud or if you've also omitted any additional tax documents.
Bad debt deduction
Do you have clients who have neglected to pay their invoices? You're legally allowed to write off the value of these invoices as "bad debt" on your tax return. You'll need to hold onto your supporting documents (including your invoices) for seven years when you take this deduction.
However, the IRS stipulates that you have to demonstrate a good faith effort to recover these funds before taking this deduction, so you may need to keep records of any correspondence to verify your attempts to recover this debt.
What are worthless securities? They're investments no longer hold market value. You can claim losses on your business tax returns. You'll need to maintain these records for seven years.
How long do I have to save other business records?
In addition to your income and payroll records, your business will invariably accrue plenty of miscellaneous business documents. While some of these business records relating to your tax filings, others correspond to your company's internal record-keeping procedures. Here's a quick overview of handling these sorts of miscellaneous business records.
Even if they serve no specific tax purpose, you should keep your bank statements for three to seven years. This allows you to maintain historical records of your company's finances, which can help make future projections or validate your income.
If you're using an online bank account, there's no need to save paper copies of your bank statements. Electronic records will work just as well. As a bonus, they are usually easier to manage than a binder full of paper!
Your accounting records include things like:
- Financial statements
- Profit and loss statements
- Annual reports
- Audit reports
Most industry experts would advise that you keep accounting records for seven years. However, some accountants argue that you should maintain these business records indefinitely to generate accurate reports.
Thankfully, business software platforms enable you to keep business records electronically and generate reports on the fly, simplifying your record-keeping process.
Other business documents are neither legal nor financial but relate instead to the day-to-day operation of your business. These documents might include:
- Employee manuals
- Company policies
- Information about insurance policies
- Minutes from shareholder meetings
Additionally, some of your operational records might be classified as legal documents, which are necessary to demonstrate ownership of your business or provide details about your legal structure.
How long should I save employee records?
In addition to your tax filing documents, your business will also accumulate a lot of data about your employees. Some of these business records will directly impact your tax return, while others are simply a matter of maintaining clear records of your business operations. Let's review each.
Human resources files should be maintained for seven years from the date your employee retires, resigns, or is terminated. These records should include items such as:
- Job applications
- Job descriptions
- Performance reviews
- Other supporting documents
If the employee was injured on the job, these documents should be kept for at least seven years from the date that worker's last compensation was paid.
Job applicant information
Some small businesses will face specific legal requirements relating to hiring records. If you have 15 or more employees, your business is subject to Title VII and the Americans with Disabilities Act (ADA). If you have 20 or more employees, your business is also subject to the Age Discrimination in Employment Act (ADEA).
These laws are designed to protect workers against discrimination and unfair hiring practices. To comply, you'll need to keep hiring records on each position for at least one year from the date you made your hiring decision.
Employment tax records
Payroll tax records should be maintained for at least four years. This includes such information as:
- Your employee identification number (EIN)
- Employee's personal information
- Amounts of wage, annuity, or pension payments
- Amounts of tips received
- Employment details (dates of employment, paid absences, etc.)
- Copies of employee income tax withholding allowance
- Details of tax deposits made
- Copies of tax returns
- Undeliverable W-2s
Just remember, you should keep these tax filing documents for four years, but your other employee records should be maintained for seven years.
How long do I need to keep legal documents?
You should always keep key business documents on hand. These include legal documents such as:
- Ownership records
- Company formation documents (e.g., partnership agreement, articles of incorporation, etc.)
- Titles to company property
- Business licenses and permits
- Insurance documents
Business advisors would stress the importance of keeping these business records indefinitely, as they provide validation that you own the business. Your insurance documents can likewise provide guidance for filing a claim. They also offer a record that your company is covered for specific events.
What to do when the time is up
Congratulations! You've maintained careful business records for three years or even longer. Now what? Since you're probably in the clear from the IRS, you could dispose of your documents, taking care to shred them to prevent sensitive data from falling into the wrong hands.
However, you may want to keep these records a bit longer. Your insurance company or creditors might require you to hold onto certain business records for a longer period of time, especially if these records are related to a business contract or insurance policy. You might want to check to ensure you've fulfilled any additional obligations before you make the purge.
Ditch the shoebox
Keeping business records doesn't have to mean you stockpile mounds of paperwork or squirrel away receipts in a disorganized shoebox. Today's small business community relies on electronic record-keeping solutions that you can use to manage your company finances and provide business reports to help you stay on top of every aspect of your business.
At Invoice2go, a Bill.com company , we provide business reporting tools that can be used to help plan for tax season, manage cash flow, and analyze every aspect of your company's performance. These insights can help you refine your strategy and plan for the future, all while ensuring you stay in compliance with tax regulations.
Frequently asked questions
You might want to consult a professional tax advisor for specific advice about your business. However, the following are some of the most common questions about keeping business records.
The period of limitations begins on either the date of your previous tax return or the tax return due date, whichever comes first. This means that if you file your taxes on January 15, but the deadline is April 15, then you'll need to save your business records for at least three years starting from April 15.
If for any reason you pay after the deadline (such as if you file for a tax extension), the statute of limitations will begin from that later payment date.
Typically, the IRS will only audit taxes from the past three years. However, there are many exceptions to this rule. For instance, if you omitted more than 25% of your income, the IRS may go back six years, which is why you need to save these documents for six years or more.
However, be advised that the IRS has no real statute of limitations if they suspect fraud or if you omit documents related to your income taxes. Make sure to file your taxes promptly and accurately and keep business records connected to your income and expenses.
Should you decide to close your business, the time limits listed above will remain in effect. You'll need to keep business records for a minimum of three years from the date that you closed your business (and longer for the documents we've outlined above).
You'll also need to maintain a record of the other documents connected to your business, such as copies of your foundational documents that provide evidence that you were once the company's owner.
Thankfully, you don't have to keep paper records of your finances and other important data. Digital records serve the same function -- and they don't require a filing system to maintain. For instance, you can use your online bank statements instead of paper copies. Even your receipts can be scanned and digitized to provide a record of your income and expenses.